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The Impact of Interest-rate Subsidies on Long-term Household Debt: Evidence from a Large Program

Ernesto Villanueva
Nuno C. Martins
Ano de Divulgação 
Código JEL 
D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
E21 - Consumption; Saving
H20 - General
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.
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