Consumption Smoothing after the Final Mortgage Payment : Testing the Magnitude Hypothesis

We examine whether the magnitude of an anticipated income change impacts consumption smoothing (i.e. the magnitude hypothesis). Even though this hypothesis has been discussed for 50 years, we are one of the first to provide formal statistical evidence to support it. We consider the natural experiment of an individual's final mortgage payment, which is an anticipated income change, and examine how it impacts credit card expenditure. We can identify causality because the dates of final mortgage payments across individuals are uncorrelated with unobserved determinants of consumption. Using an event study methodology, we provide evidence to support the magnitude hypothesis