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Consumption Smoothing after the Final Mortgage Payment: Testing the Magnitude Hypothesis

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  • Barry Scholnick

    (University of Alberta)

Abstract

We examine whether the magnitude of an anticipated income change affects consumption smoothing (the magnitude hypothesis). Although this hypothesis has been discussed for fifty years, we are one of the first to provide formal statistical evidence to support it. We consider the natural experiment of an individual's final mortgage payment, an anticipated income change, and examine how it affects credit card expenditure. We can identify causality because the dates of final mortgage payments across individuals are uncorrelated with unobserved determinants of consumption. Using an event study methodology, we provide evidence to support the magnitude hypothesis. © 2013 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Barry Scholnick, 2013. "Consumption Smoothing after the Final Mortgage Payment: Testing the Magnitude Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1444-1449, October.
  • Handle: RePEc:tpr:restat:v:95:y:2013:i:4:p:1444-1449
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    Citations

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    Cited by:

    1. 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, vol. 72(C), pages 21-41.
    2. Tarek A. Hassan & Thomas M. Mertens, 2017. "The Social Cost of Near-Rational Investment," American Economic Review, American Economic Association, vol. 107(4), pages 1059-1103, April.
    3. Fuchs-Schündeln, N. & Hassan, T.A., 2016. "Natural Experiments in Macroeconomics," Handbook of Macroeconomics, Elsevier.
    4. Mikhed, Vyacheslav & Scholnick, Barry, 2014. "How do exogenous shocks cause bankruptcy? Balance sheet and income statement channels," Working Papers 14-17, Federal Reserve Bank of Philadelphia.
    5. Sumit Agarwal, 2015. "Age of Decision: Pension Savings Withdrawal and Consumption and Debt Response," 2015 Meeting Papers 709, Society for Economic Dynamics.
    6. Mikhed, Vyacheslav & Scholnick, Barry, 2016. "The Causes of Household Bankruptcy: The Interaction of Income Shocks and Balance Sheets," Working Papers 16-19, Federal Reserve Bank of Philadelphia.

    More about this item

    Keywords

    consumption smoothing; mortgage payments;

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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