Interest Rate Pass-Through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging

Interest Rate Pass-Through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging

By
Marco Di Maggio, Benjamin Keys, Tomasz Piskorski, Rodney Ramcharan, Amir Kermani, Amit Seru, Vincent Yao
American Economic Review. November
2017, Vol. 107, Issue 11, Pages 3350-3388

Exploiting variation in the timing of resets of adjustable-rate mortgages (ARMs), we find that a sizable decline in mortgage payments (up to 50 percent) induces a significant increase in car purchases (up to 35 percent). This effect is attenuated by voluntary deleveraging. Borrowers with lower incomes and housing wealth have significantly higher marginal propensity to consume. Areas with a larger share of ARMs were more responsive to lower interest rates and saw a relative decline in defaults and an increase in house prices, car purchases, and employment. Household balance sheets and mortgage contract rigidity are important for monetary policy pass-through.