Consumption Smoothing After the Final Mortgage Payment: Testing the Magnitude Hypothesis
University of Alberta - Department of Marketing, Business Economics & Law
May 1, 2010
We examine whether the magnitude of an anticipated income change impacts consumption smoothing (i.e. the magnitude hypothesis). Even though this hypothesis has been discussed for almost 50 years, we are one of the first to provide formal statistical evidence to support it. We consider the natural experiment of an individual’s final mortgage payment, and examine how it impacts credit card consumption. The final mortgage payment is an anticipated change in disposable income, thus theory predicts that consumption should not respond on that date. Our treatment group consists of individuals who make a final mortgage payment and our control group consists of individuals who continue to make monthly mortgage payments. We can identify causality as running from the final mortgage payment to credit card consumption because the dates of final mortgage payments are distributed across individuals over time. We find that the magnitude of final mortgage payments does impact the response of credit card consumption.
Number of Pages in PDF File: 39
Keywords: Credit Card, Mortgage, Consumption Smoothing
JEL Classification: D14, G21working papers series
Date posted: March 13, 2009 ; Last revised: January 30, 2013
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