Paper #713

Title:

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

Authors:

Nuno C. Martins and Ernesto Villanueva

Date:

October 2003

Abstract:

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.

Keywords:

Consumer borrowing, subsidies, quasi-natural experiment

JEL codes:

D91, E21, H20

Area of Research:

Labour, Public, Development and Health Economics

Published in:

Journal of Public Economics, 90, (8-9), 1601-1623, 2006
With the title:
The Impact of Mortgage Interest Rate Subsidies on Household Borrowing

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