1 Harvard Business School, Baker Library 265, Boston, MA 02163 (email: ) · 2 Hass School of Business, UC Berkeley, F-614, Berkeley, CA 94720 (email: ) · 3 Wharton School, University of Pennsylvania, 1461 Steinberg-Dietrich Hall, 3620 Locust Walk, Philadelphia, PA 19104 (email: ) · 4 Columbia Business School, Uris Hall 810, New York, NY 10027 (email: ) · 5 Marshall School of Business, University of Southern California, Ralph and Goldy Lewis Hall 324, Los Angeles, CA 90089 (email: ) · 6 Stanford Graduate School of Business, 655 Knight Way, Stanford, CA 94305 (email: ) · 7 J. Mack Robinson College of Business, Georgia State University, 35 Broad Street, Atlanta, GA 30303 (email: )
open access
Abstract
Exploiting variation in the timing of resets of adjustable-rate mortgages (ARMs), we find that a sizable decline in mortgage payments (up to 50 percent) induces a significant increase in car purchases (up to 35 percent). This effect is attenuated by voluntary deleveraging. Borrowers with lower incomes and housing wealth have significantly higher marginal propensity to consume. Areas with a larger share of ARMs were more responsive to lower interest rates and saw a relative decline in defaults and an increase in house prices, car purchases, and employment. Household balance sheets and mortgage contract rigidity are important for monetary policy pass-through.