The heterogeneity of interest-induced MPC: Evidence from mortgage borrowers

Using comprehensive credit bureau data of South Korea, this paper explores the heterogeneous interest-induced Marginal Propensity to Consume (MPC) for mortgage borrowers by their liquidity, credit accessibility, and debt burden. The main findings are as follows. First, the negative relationship between interest payments and consumption comes from borrowers with Adjustable-Rate Mortgages (ARMs). Second, among mortgagors with ARMs, those with low liquidity and credit accessibility show a high interest-induced MPC. Third, the mortgagors with high debt burdens show relatively low interest-induced MPC due to active deleveraging behavior. Fourth, while unconstrained borrowers consistently show low and insignificant MPC, constrained borrowers (those with low liquidity, credit accessibility) maintain long-lasting high MPCs for eight quarters after interest reduction. These results imply that the magnitude and persistence of consumption effect of interest payment reduction depend largely on financial characteristics of mortgage borrowers.