Monetary Restraint and Excess Sensitivity of Consumption

The micro transmission of monetary policy has significant welfare implications. In this paper, we exploit a natural experiment that renders a series of increases in the mortgage rate, and investigate its impact on household consumption. Using data from Urban Household Survey in China, our difference-in-differences estimations imply that the average propensity to consume of mortgagors decreases by 2.2 and 2.9 percentage points after the announcement and reset of mortgage rates, as compared with homeowners without mortgage obligations. Meanwhile, households are in a passive position of downgrade through lowing the quantity (quanlity) of consumption in price-inelastic (quantity-inelastic) sectors. The results are mainly driven by precautionary motives associated with the unanticipated shocks in lending rates. Hence, sudden adjustment of the de facto policy-controlled rates has higher welfare cost than the market-driven lending rates