Consumption Stimulation or Debt Overhang:The Duration Dependence of Mortgage Rates Policy
Monetary policy is widely recognized as an important tool for stimulating household consumption.However,despite the implementation of various monetary and credit policies aimed at addressing the issue of"insufficient effective domestic demand",the effectiveness of these policies remains uncertain.Therefore,it is crucial to gain a deeper understanding of the transmission channels of key macroeconomic policy instruments to enhance macroeconomic governance.This paper constructs a heterogeneous agent life-cycle model incorporating state variables such as liquid assets,housing assets,and mortgages to analyze the transmission mechanism of monetary policy.Literature suggests that the transmission channels of monetary policy can be broadly categorized into indirect and direct effects,with the direct effects further divided into cash flow and refinancing channels.However,the structure of China's mortgage market adds complexity to this analysis.The underdeveloped home equity loan market limits households'access to home equity,weakening the refinancing channel.Meanwhile,both deposit and mortgage interest rates have remained low since the People's Bank of China cut rates five times in 2014,creating a persistently low interest rate environment.Given these circumstances,this paper constructs two counterfactual scenarios to examine the short-term stimulative effects of monetary policy and analyzes the mitigating or amplifying effects of a prolonged low-interest rate environment.The findings indicate that in the short run,interest rate cuts can stimulate household consumption,with the wealth effect amplifying this due to rising housing prices.However,in the long run,prolonged lower interest rates can lead to at least three adverse effects on consumption:a negative income effect from low deposit rates,a substitution effect from consumption to housing services driven by low mortgage rates,and a debt overhang effect from accumulating mortgage debt.Consequently,household consumption falls below the initial steady-state level.This study indicates that the transmission of monetary policy is not only path-dependent and state-dependent but also duration-dependent.In other words,if the stance of monetary policy remains accommodative for an extended period,or if households perceive that such a stance will persist,they will increase their housing demand while reducing consumption,thereby inhibiting the establishment of a"dual circulation"pattern.This paper makes key contributions to existing literature:First,it constructs a China-specific housing demand model to analyze the transmission of monetary policy through the household sector,emphasizing the significant role of the household balance sheet channel.Then,it analyzes the effects of prolonged low interest rates on household consumption.Finally,it offers new insights into the understanding of the household debt cycle.
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