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Review of Finance Vol. 26 No. 3 2022

Mortgage Debt, Hand-to-Mouth Households, and Monetary Policy Transmission

Sumit Agarwal1; Yongheng Deng2; Quanlin Gu3; Jia He4; Wenlan Qian5; Yuan Ren6

1 NUS Business School, National University of Singapore , Singapore City, · 2 Wisconsin School of Business, University of Wisconsin–Madison , Madison, Wisconsin, · 3 China Center for Internet Economy Research, Central University of Finance and Economics, and Wuxi Xishang Bank , Beijing, · 4 School of Finance, Nankai University , Tianjin, · 5 HKU Business School, University of Hong Kong , and NUS Business School, National University of Singapore, Singapore City, · 6 School of Economics and Academy of Financial Research , Zhejiang University, Hangzhou,

open access

Abstract

Using a representative sample of credit card holders from a leading Chinese commercial bank, we investigate how consumers respond to an unexpected interest rate decrease that automatically reduces interest expenses for all mortgage borrowers in the country and thereby generates significant positive disposable-income shocks. Our difference-in-differences analysis shows that compared with homeowners without mortgage obligations, mortgage borrowers increased their monthly credit card spending by 8.7% after the 230-bps mortgage rate reduction announced in September 2008. We find a significant spending response both immediately after the announcement and during the post-reset period. The credit card delinquency rate also decreased after the mortgage rate reset. Subsequent to an interest-rate increase episode, mortgage borrowers symmetrically reduced their credit card spending. Hand-to-mouth mortgage borrowers experienced a more pronounced spending increase. The debt-service channel plays an important role in transmitting monetary policy—our estimate implies a marginal propensity to consume 0.40–0.54 through credit card spending.

DOI
10.1093/rof/rfac011
Volume
26
Issue
3
Pages
487-520
Language
en
Sources
crossref bibtex:phds-export.bib openalex

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