CANCELLED - Mortgage debt and household expenditures
We take advantage of a unique experiment that took place in Iceland in 2015. Following the collapse of the country's banking system in 2008, the authorities decided on a program of mortgage relief that in effect lowered the principal of mortgages overnight. We measure the effect of the mortgage relief on the saving of every taxpayer in the country using households that were not eligible for debt relief as a control group. While a negative wealth effect on saving could have been expected, households amortize even more in response to the debt forgiveness. The increased amortization is not only due to lower interest costs but also due to higher saving, mostly by highly leveraged and liquidity constrained households.