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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)

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.

Suggested Citation

  • Brahima Coulibaly & Geng Li, 2006. "Do Homeowners Increase Consumption after the Last Mortgage Payment? An Alternative Test of the Permanent Income Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 10-19, February.
  • Handle: RePEc:tpr:restat:v:88:y:2006:i:1:p:10-19
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    Cited by:

    1. Jenny Gu & Rodrigo J. Hernandez & Pu Liu & Yingying Shao, 2017. "Mortgage loan securitization and personal consumption smoothening," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 41(1), pages 100-115, January.
    2. Hyrum Smith & Michael Finke & Sandra Huston, 2012. "Financial Sophistication and Housing Leverage Among Older Households," Journal of Family and Economic Issues, Springer, vol. 33(3), pages 315-327, September.
    3. 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 79786, Verein für Socialpolitik / German Economic Association.
    4. Tarek A. Hassan & Thomas M. Mertens, 2017. "The Social Cost of Near-Rational Investment," American Economic Review, American Economic Association, pages 1059-1103.
    5. 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.
    6. João Ricardo Faria & Peter Mcadam, 2013. "Anticipation of Future Consumption: A Monetary Perspective," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(2-3), pages 423-447, March.
    7. Christelis, Dimitris & Georgarakos, Dimitris & Jappelli, Tullio, 2015. "Wealth shocks, unemployment shocks and consumption in the wake of the Great Recession," Journal of Monetary Economics, Elsevier, pages 21-41.
    8. Laamanen, Jani-Petri, 2017. "Home-ownership and the Labour Market: Evidence from Rental Housing Market Deregulation," Labour Economics, Elsevier, pages 157-167.
    9. 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, vol. 105(1), pages 127-129, October.
    10. Youngjoo Choi & Jong Chil Son, 2016. "Nonlinear Effect of Household Debt on Consumption: Evidence from Household-level Panel Data in Korea," Economics Bulletin, AccessEcon, vol. 36(2), pages 1083-1094.
    11. Fuchs-Schündeln, N. & Hassan, T.A., 2016. "Natural Experiments in Macroeconomics," Handbook of Macroeconomics, Elsevier.
    12. Satoshi Shimizutani, 2017. "College tuition payment and household consumption in Japan," Review of Economics of the Household, Springer, vol. 15(1), pages 265-285, March.
    13. Ángel Estrada & Daniel Garrote & Eva Valdeolivas & Javier Vallés, 2015. "Household Debt and Uncertainty: Private Consumption after the Great Recession," Monetaria, Centro de Estudios Monetarios Latinoamericanos, vol. 0(1), pages 71-109, january-j.
    14. Daniel Aaronson & Sumit Agarwal & Eric French, 2008. "The consumption response to minimum wage increases," Working Paper Series WP-07-23, Federal Reserve Bank of Chicago.
    15. Can Cui, 2017. "Cash-on-hand and demand for credit," Empirical Economics, Springer, pages 1007-1039.
    16. Scholnick, Barry, 2009. "Credit card use after the final mortgage payment: does the magnitude of income shocks matter?," Working Paper Series 1142, European Central Bank.
    17. 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, vol. 9(4), pages 445-463, December.

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