Exploiting variation in the timing of resets of adjustable-rate mortgages (ARMs), we find that a sizable decline in mortgage payments (up to 50 percent) induces a significant increase in car purchases (up to 35 percent). This effect is attenuated by voluntary deleveraging. Borrowers with lower incomes and housing wealth have significantly higher marginal propensity to consume. Areas with a larger share of ARMs were more responsive to lower interest rates and saw a relative decline in defaults and an increase in house prices, car purchases, and employment. Household balance sheets and mortgage contract rigidity are important for monetary policy pass-through. (JEL D12, D14, E43, E52, G21, R31)There has been a long-standing debate among economists regarding the effects of interest rates on the real economy (e.g., Bernanke and Gertler 1995). During the Great Recession, the Federal Reserve substantially reduced the overnight lending rate target and made large purchases of mortgage-backed securities in an attempt to stimulate household spending and support the prices of assets such as houses. This paper exploits this setting to explore how changes in interest rates impact the real economy. It establishes the effects of lower mortgage rates on adjustable-rate * Di Maggio: Harvard Business School, Baker Library 265,

Does economic inequality affect redistributive policy? This paper turns to U.S. county data on land inequality over the period 1890 to 1930 to help address this fundamental question in political economy. Redistributive policy was primarily decided at the local level during this period, making county-level data particularly informative. Examining within-state variation also reduces the potential impact of latent institutional and political variables. The paper also uses a variety of identification strategies, including historic variables as well as county weather and crop characteristics, as instruments for land inequality. The evidence consistently suggests that greater inequality is significantly associated with less redistribution. This negative relationship is especially large in heavily rural counties, where concentrated landownership implied that landed elites also controlled the majority of economic production.

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provided excellent research assistance. Benmelech is grateful for financial support from the National Science Foundation under CAREER award SES-0847392. The views expressed here are those of the authors and do not necessarily reflect the views of the Board of Governors, the staff of the Federal Reserve System, or the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

2A recent literature emphasizes the political economy underpinnings of economic underdevelopment. It notes that powerful constituencies, which arise for example from the pattern of land holdings in a country, can drive the development of economic institutions, and growth more generally (see, for example, Engermann and Sokoloff (2002)). Banks are clearly important economic institutions. While historians have argued that political forces have shaped banking systems (see, for example, Haber (2005a)), there has been little systematic examination of the evidence. In this paper we examine more systematically whether the constituencies or interest groups that emerge in a country as a result of the distribution of land holdings -often the earliest and most important form of wealth --can shape the development of the banking system. 1The precise channel through which constituencies or interest groups operate is also a matter of some debate. Some (see, for example, Acemoglu, Johnson, and Robinson (2005)) argue that the mediating channel is political institutions, as elite interest groups create coercive political institutions that give them the power to hold back the development of economic institutions, and hence economic growth.Others (see, for example, Engerman and Sokoloff (2003), Rajan and Zingales (2003a, chapter 6) or Rajan (2009)) argue that a divided society may be sufficient to hold back the development of economic institutions, even if political institutions are broadly egalitarian.One way to make progress on both questions (whether landed interest groups affect financial development and whether this can happen even in broadly democratic societies) is to examine patterns within broad political units such as countries or states, where political institutions are held relatively constant. To this end, we explore how the structure of banking across counties in the United States in the early part of the 20 th century was driven by the distribution of land within the county. We focus on banks because they were, and in many areas still are, the most important source of local finance, and thus are important economic institutions. Likewise, we focus on the distribution of land because it represents the distribution of agricultural wealth and interests at a time when agriculture was still a key sector in the U.S. economy.3 Why Did Landlords Restrict Credit?Clearly, large landowners may have had the money and power to influence county politics even in a flourishing democracy. But why would they want to restrict access to credit for others, especially small farmers and tenants, by limiting the spread of banks? The contemporary literature suggests a number of reasons. First, large landowners generated loanable surpluses. Formal credit institutions could be competition for their business of lending to tenants and small farmers.Second, tenants and small farmers needed credit to buy supplies from the local store. By limiting credit from alternative sources -for instance, by keeping banks out --the local merchant could lock the ...