Pinching Pennies: Monetary Restraint and Excess Sensitivity

This paper focuses on a series of increases in the mortgage rate in China and investigates its impacts on household consumption. Based on granular diary data, our difference-in-differences estimations imply that compared with that of homeowners without mortgage obligations, the average propensity of mortgagors to consume decreases by 2.2 and 2.9 percentage points after the announcement and reset of mortgage rates, respectively. The results are mainly driven by precautionary motives associated with unanticipated shocks in lending rates. Hence, the sudden adjustment of de facto policy-controlled rates has higher welfare costs than that of market-driven lending rates.