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

57 Pages Posted: 29 May 2019 Last revised: 23 Dec 2019

See all articles by Katya Kartashova

Katya Kartashova

Bank of Canada

Xiaoqing Zhou

Federal Reserve Banks - Federal Reserve Bank of Dallas

Date Written: April 29, 2019

Abstract

We study the causal effect of mortgage rate changes on consumer spending, debt repayment, and defaults during an expansionary and a contractionary monetary policy episode in Canada. Our identification takes advantage of the fact that the interest rates of short-term fixed-rate mortgages (the dominant product in Canada’s mortgage market) have to be reset according to the prevailing market interest rates at predetermined time intervals. Our empirical strategy exploits this exogenous variation in the timing of mortgage rate resets. We find asymmetric responses of consumer durable spending, deleveraging, and defaults. These results can be rationalized by the cash-flow effect in conjunction with changes in consumers’ expectations about future interest rates. Our findings help to understand the responses of the household sector to changes in the interest rate, especially in countries where variable-rate, adjustable-rate, and short-term fixed-rate mortgages are prevalent.

Keywords: Mortgage Rate Refinancing, Household Balance Sheets, Consumption, Consumer Expectations, Mortgage Contract Rigidity, Monetary Policy

JEL Classification: D12, D14, E43, E52, G21, R31

Suggested Citation

Kartashova, Katya and Zhou, Xiaoqing, How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers (April 29, 2019). Available at SSRN: https://ssrn.com/abstract=3381251 or http://dx.doi.org/10.2139/ssrn.3381251

Katya Kartashova (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

Xiaoqing Zhou

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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