Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/241184 
Year of Publication: 
2020
Series/Report no.: 
Bank of Canada Staff Working Paper No. 2020-18
Publisher: 
Bank of Canada, Ottawa
Abstract: 
We study the causal effect of mortgage rate changes on consumer spending, debt repayment, and defaults during an expansionary and a contractionary monetary policy episode in Canada. Our identification takes advantage of the fact that the interest rates of short-term fixed-rate mortgages (the dominant product in Canada's mortgage market) have to be reset according to the prevailing market interest rates at predetermined time intervals. Our empirical strategy exploits this exogenous variation in the timing of mortgage rate resets. We find asymmetric responses of consumer durable spending, deleveraging, and defaults. These results can be rationalized by the cash-flow effect in conjunction with changes in consumers' expectations about future interest rates. Our findings help us to understand the responses of the household sector to changes in the interest rate, especially in countries where variable-rate, adjustable-rate, and short-term fixed-rate mortgages are prevalent.
Subjects: 
Credit and credit aggregates
Interest rates
Monetary policy
Transmission of monetarypolicy
JEL: 
D12
D14
E43
E52
G21
R31
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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