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Mortgage payments and household consumption in urban China☆

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Abstract By exploiting variation both in mortgage payoffs and mortgage interest-rate resets, we find that a decline in mortgage payments induces a significant increase in nondurable goods spending, even when… Click to show full abstract

Abstract By exploiting variation both in mortgage payoffs and mortgage interest-rate resets, we find that a decline in mortgage payments induces a significant increase in nondurable goods spending, even when households have substantial amounts of liquidity. Following mortgage payoff, households increase consumption expenditures by 61% of the original payment. In comparison, households increase consumption by only 36% in response to a transitory payment adjustment induced by interest rate changes. Households with a higher payment-to-income ratio have a significantly lower marginal propensity to consume (MPC). These results have practical implications for policy markers seeking to design consumption boosting policies and are important for understanding how changes in monetary policy may affect consumer spending patterns.

Keywords: consumption urban; mortgage payments; mortgage; consumption; household consumption; payments household

Journal Title: Economic Modelling
Year Published: 2020

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