nr 026 - The Impact of Interest-Rate Subsidies on Long-Term Household Debt: Evidence From a Large Program

DNB Working Papers
Date 7 January 2005
The responsiveness of long-term household debt to the interest rate is a crucial pa- rameter for assessing the effectiveness of public policies aimed at promoting specific types of saving. This paper estimates the effect of a reform of a large program that subsidized mortgage interest rates on long-term household debt. The reform established a ceiling in the price of the house that could be √ěnanced through the program, and provides plau- sibly exogenous variation in incentives. Using a unique dataset of matched household survey data and administrative records of debt, we document that loss of access to the subsidy decreased the probability of signing a new loan. Keywords: Consumer Borrowing, Mortgage interest rate subsidies, Quasi-natural experiment. JEL Codes: D91, E91, H20.