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Do Homeowners Increase Consumption after the Last Mortgage Payment? An Alternative Test of the Permanent Income Hypothesis

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  • Brahima Coulibaly
  • Geng Li

    (Board of Governors of the Federal Reserve System)

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Abstract

The maturity date of a mortgage loan marks the end of monthly mortgage payments for homeowners. In the period after the last payment, homeowners experience an increase in their disposable income. Our study interprets this event as an anticipated increase in income, and tests whether households smooth consumption over the transition period as predicted by the rational-expectation life-cycle-permanent-income hypothesis. We find households do not alter nondurable-goods consumption in the period following the last mortgage payment. Instead, they increase both financial savings and savings in durable goods such as house furnishings and entertainment equipment in the year of the last mortgage payment. © 2006 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 88 (2006)
Issue (Month): 1 (February)
Pages: 10-19

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Handle: RePEc:tpr:restat:v:88:y:2006:i:1:p:10-19

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Web page: http://mitpress.mit.edu/journals/

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Web: http://mitpress.mit.edu/journal-home.tcl?issn=00346535

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Cited by:
  1. Hori, Masahiro & Shimizutani, Satoshi, 2012. "Do households smooth expenditure over anticipated income changes? Evidence from bonus payments to public employees in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 26(3), pages 405-433.
  2. Borella, Margherita & Fornero, Elsa & Rossi, Mariacristina, 2009. "Does consumption respond to predicted increases in cash-hand availability?: Evidence from the Italian "severance pay"," Economics Letters, Elsevier, Elsevier, vol. 105(1), pages 127-129, October.
  3. Scholnick, Barry, 2009. "Credit card use after the final mortgage payment: does the magnitude of income shocks matter?," Working Paper Series, European Central Bank 1142, European Central Bank.
  4. Klos, Alexander & Rottke, Simon, 2013. "Saving and Consumption When Children Move Out," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order, Verein für Socialpolitik / German Economic Association 79786, Verein für Socialpolitik / German Economic Association.
  5. Brighita Negrusa & Sonia Oreffice, 2011. "Sexual orientation and household financial decisions: evidence from couples in the United States," Review of Economics of the Household, Springer, Springer, vol. 9(4), pages 445-463, December.
  6. Hyrum Smith & Michael Finke & Sandra Huston, 2012. "Financial Sophistication and Housing Leverage Among Older Households," Journal of Family and Economic Issues, Springer, Springer, vol. 33(3), pages 315-327, September.
  7. Hyytinen, Ari & Putkuri, Hanna, 2012. "Household optimism and borrowing," Research Discussion Papers, Bank of Finland 21/2012, Bank of Finland.
  8. peter mcadam & Jocka Faria, 2012. "Anticipation of Future Consumption: A Monetary Perspective," EcoMod2012, EcoMod 3982, EcoMod.
  9. Daniel Aaronson & Sumit Agarwal & Eric French, 2008. "The consumption response to minimum wage increases," Working Paper Series, Federal Reserve Bank of Chicago WP-07-23, Federal Reserve Bank of Chicago.

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