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Interest rate changes, mortgages, and consumption: evidence from Italy

Author

Listed:
  • Tullio Jappelli
  • Annalisa Scognamiglio

Abstract

SUMMARYUsing the Italian Survey of Household Income and Wealth, we study whether the drop in interest rates following the Great Recession was associated with an increase in consumption for households with Adjustable Rate Mortgages (ARM) relative to those with Fixed Rate Mortgages (FRM). After the reduction in mortgage payments, consumption of ARM holders increases relative to FRM but the implied marginal propensity to consume is not statistically different from zero. We suggest three explanations for the weak consumption response to the income shock. First, cash-on-hand and debt heterogeneity may attenuate the consumption response. Second, borrowers believe that the income shock was short-lasting, and that interest rates would likely increase in the future, implying a small effect on consumption. Third, the shock is offset partly by a reduction in income from financial assets owned by mortgagors. The findings have implications for the conduct of monetary policy interventions and the credibility of the future path of interest rates, pass-through of monetary policy, and design of the mortgage market.

Suggested Citation

  • Tullio Jappelli & Annalisa Scognamiglio, 2018. "Interest rate changes, mortgages, and consumption: evidence from Italy," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 33(94), pages 183-224.
    • Handle: RePEc:oup:ecpoli:v:33:y:2018:i:94:p:183-224.
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    File URL: http://hdl.handle.net/10.1093/epolic/eiy001
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    Citations

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    Cited by:

    1. Giacomo Rella, 2021. "The Fed, housing and household debt over time," Department of Economics University of Siena 850, Department of Economics, University of Siena.
    2. Tan, Zhengxun & Tang, Qianqian & Meng, Juan, 2022. "The effect of monetary policy on China’s housing prices before and after 2017: A dynamic analysis in DSGE model," Land Use Policy, Elsevier, vol. 113(C).
    3. Dimitris Georgarakos & Konstantinos Tatsiramos, 2019. "Monetary policy transmission to consumer financial stress and durable consumption," CESifo Working Paper Series 7671, CESifo.
    4. Daniel H. Cooper & Vaishali Garga & María Jose Luengo-Prado, 2021. "The Mortgage Cash Flow Channel of Monetary Policy Transmission: A Tale of Two Countries," Working Papers 21-8, Federal Reserve Bank of Boston.
    5. Sang-yoon Song, 2019. "The Cash-Flow Channel of Monetary Policy: Evidence from Mortgage Borrowers," Working Papers 2019-20, Economic Research Institute, Bank of Korea.
    6. Tzamourani, Panagiota, 2021. "The interest rate exposure of euro area households," European Economic Review, Elsevier, vol. 132(C).
    7. Sumit Agarwa & Yongheng Deng & Quanlin Gu & Jia He & Wenlan Qian & Yuan Ren, 2022. "Mortgage Debt, Hand-to-Mouth Households, and Monetary Policy Transmission [Policy intervention in debt renegotiation: evidence from the home affordable modification program]," Review of Finance, European Finance Association, vol. 26(3), pages 487-520.
    8. Katya Kartashova & Xiaoqing Zhou, 2020. "How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian Consumers," Staff Working Papers 20-18, Bank of Canada.
    9. Song, Sang-yoon, 2022. "The heterogeneity of interest-induced MPC: Evidence from mortgage borrowers," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 402-417.
    10. Sala, Hector & Trivín, Pedro, 2022. "Family Finances and Debt Overhang: Evolving Consumption Patterns of Spanish Households," IZA Discussion Papers 15222, Institute of Labor Economics (IZA).
    11. Jin Cao & Chao Cui & Valeriya Dinger & Martin B. Holm & Shulong Kang, 2022. "Identifying the depreciation rate of durables from marginal spending responses," Working Paper 2022/1, Norges Bank.

    More about this item

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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