How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers

Katya Kartashova and Xiaoqing Zhou

No 2206, Working Papers from Federal Reserve Bank of Dallas

Abstract: One of the most important channels through which monetary policy affects the real economy is changes in mortgage rates. This paper studies the effects of mortgage rate changes resulting from monetary policy shifts on homeowners’ spending, debt repayment and defaults. The Canadian institutional setting facilitates the design of identification strategies for causal inference, since the vast majority of mortgages in the country experience predetermined, periodic and automatic contract renewals with the mortgage rate reset based on the prevailing market rate. This allows us to exploit quasi-random variation in the timing of the rate reset and present causal evidence for both rate declines and increases, with the help of detailed, representative consumer credit panel data. We find asymmetric effects of rate changes on spending, debt repayment and defaults. Our results can be rationalized by the conventional cash-flow effect in conjunction with changes in consumer expectations about future interest rates upon the reset. Given the pervasiveness of Canadian-type mortgages in many other OECD countries, our findings have broader implications for the transmission of monetary policy to the household sector.

Keywords: Mortgage rate; monetary policy; consumption; consumer expectations; household finances (search for similar items in EconPapers)
JEL-codes: D12 D14 E43 E52 G21 R31 (search for similar items in EconPapers)
Pages: 65
Date: 2022-05-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Working Paper: How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers (2020)
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DOI: 10.24149/wp2206

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