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The impact of interest-rate subsidies on long-term household debt: Evidence from a large program

  • Nuno C. Martins
  • Ernesto Villanueva

The responsiveness of long-term household debt to the interest rate is a crucial parameter for assessing the effectiveness of public policies aimed at promoting specific types of saving. This paper estimates the effect of a reform of Credito Bonificado, a large program in Portugal that subsidized mortgage interest rates, on long-term household debt. The reform established a ceiling in the price of the house that could be financed through the program, and provides plausibly exogenous variation in incentives. Using a unique dataset of matched household survey data and administrative records of debt, we document a large decrease in the probability of signing a new loan after the removal of the subsidy.

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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 713.

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Date of creation: Oct 2003
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Handle: RePEc:upf:upfgen:713
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