Author:
Ross M. Batzer
*Revised March 2024
Abstract:
This paper studies how mortgage debt shapes the consumption response to cash transfers using an incomplete markets model with housing and long-term debt. Among homeowners, the model predicts those with mortgage debt have an average spending response six times larger than those without debt, and higher levels of leverage are associated with larger increases in spending. Responses in the model are found to be poorly correlated with income. By excluding homeowners with debt, conditioning transfers on having low income substantially reduces their efficacy in increasing aggregate spending. The opposite is predicted by a standard model of consumer spending without mortgages.
A blog has been written about the working paper.