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

57 Pages Posted: 27 Dec 2018 Last revised: 16 Jul 2019

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Quanlin Gu

Peking University

Jia He

Nankai University

Wenlan Qian

National University of Singapore - NUS Business School

Yuan Ren

National University of Singapore (NUS) - NUS Business School

Date Written: January 29, 2019

Abstract

Using a representative sample of credit card holders from a Chinese commercial bank with a 10% credit card market share, we investigate how consumers respond to an unexpected interest rate decrease that automatically reduces interest expenses for all mortgagors in the country and thereby generates significant positive disposable-income shocks. Our difference-in-differences analysis shows that compared with homeowners without mortgage obligations, mortgagors increased their monthly credit card spending by 7.2% after the 230bps 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, mortgagors symmetrically reduced their credit card spending. Hand-to-mouth consumers experienced a pronounced spending increase, even among those with a high credit limit, and their response was concentrated in the post-reset period. The debt-service channel plays an important role in transmitting monetary policy—our estimate implies a marginal propensity to consume (MPC) of 0.40-0.51 through credit card spending.

Keywords: Consumption, Monetary Policy, Disposable Income Shocks, MPC, Mortgage, Housing, Policy, Constraints, Credit Access, Wealthy Hand-to-Mouth, Debt, Deleverage, Credit Cards, Household Finance, China

JEL Classification: E5, E21, D12, D12, D14

Suggested Citation

Agarwal, Sumit and Deng, Yongheng and Gu, Quanlin and He, Jia and Qian, Wenlan and Ren, Yuan, Mortgage Debt, Hand-to-Mouth Households, and Monetary Policy Transmission (January 29, 2019). Available at SSRN: https://ssrn.com/abstract=3298878 or http://dx.doi.org/10.2139/ssrn.3298878

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Phone)

HOME PAGE: http://https://bus.wisc.edu/faculty/yongheng-deng

Quanlin Gu

Peking University ( email )

Jia He

Nankai University ( email )

94 Weijin Road
Tianjin, 300071
China

Wenlan Qian (Contact Author)

National University of Singapore - NUS Business School ( email )

15 Kent Ridge Drive
Singapore 117592, 119245
Singapore
(65) 65163015 (Phone)

HOME PAGE: http://sites.google.com/site/wenlanqian/

Yuan Ren

National University of Singapore (NUS) - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

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