“Costly reversals of bad policies: the case of the mortgage interest deduction”
Review of Economic Dynamics 2021, Vol. 40: 85-107
With Markus Karlman and Kasper Kragh-Sørensen
This paper measures the welfare effects of removing the mortgage interest deduction under a variety of implementation scenarios. To this end, we build a life-cycle model with heterogeneous households calibrated to the U.S. economy, which features long-term mortgages and costly refinancing. In line with previous research, we find that most households would prefer to be born into an economy without the deductibility. However, when we incorporate transitional dynamics, less than forty percent of households are in favor of a reform and the average welfare effect is negative. This result holds under a number of removal designs.
“The effects of monetary policy through housing and mortgage choices on aggregate demand”
(Job Market Paper, Winner of the UniCredit Foundation Best Paper Award at VMACS CopenhagenMacro Days)
This paper explores how monetary policy affects aggregate demand by influencing households’ housing and mortgage choices. To quantify this portfolio channel, I build a heterogeneous-agent life-cycle model with long-term mortgages and endogenous house prices. I find that, although only a small fraction of households make an extensive-margin adjustment of their housing and mortgage holdings in response to an expansionary monetary policy shock, these households account for 90 percent of the direct increase in aggregate demand. Households who adjust their tenure choice to improve their liquidity explain 30 percent of the increase, uncovering a new transmission channel.
“Inertia of dominated pension investments: evidence from an information intervention”
With Louise Lorentzon
The market for long-term savings in mutual funds is characterized by high price dispersion between similar funds. In this paper, we conduct an empirical investigation into possible causes of imperfect competition in this market. We discriminate between three main hypotheses on the demand side: a lack of awareness of price dispersion, search costs, and financial illiteracy. We run a large-scale field experiment in the Swedish public pension system. Information letters are sent to pension savers in two index funds, where there exists a cheaper fund with the same index strategy. We show that the information interventions that increase the awareness of a cheaper, dominating fund and reduce the search costs for finding such an alternative, significantly improve many savers’ real investment choices, i.e., they switch to the dominating fund. Moreover, we find that such interventions can be justified based on a cost-benefit analysis. Nevertheless, our results show that there is a high degree of inertia in dominated pension investments even when search frictions for identifying dominating alternatives are eliminated, and among savers who have actively opted out of a default fund.
In this paper, we investigate to what extent stricter mortgage lending standards affect households’ ability to smooth consumption. Using a heterogeneous-household model with incomplete markets, we find that a permanently lower loan-to-value (LTV) or payment-to-income (PTI) requirement only marginally affects the aggregate consumption response to a negative wealth shock. We show that even the distribution of marginal propensities to consume across households is remarkably insensitive to these permanent policies. In contrast, households’ consumption responses can be reduced if a temporary stricter LTV or PTI requirement is implemented prior to a negative wealth shock. However, strong assumptions need to be made for temporary policies to be welfare improving.