“Monetary Policy and the Mortgage Market” (Job Market Paper)
When a central bank changes its interest rate, there are direct effects on many households’ cash flows: it changes the interest rate they pay on their mortgages. If these households are constrained in their spending, this channel can have real and direct effects on aggregate demand. In contrast, in standard frameworks of monetary policy this channel is absent; there, changes in the policy rate affect consumption demand only via a forward-looking Euler equation. To focus on the cash-flow effect, I build a heterogeneous-agent life-cycle model with housing and long-term mortgage contracts. The illiquid nature of housing gives rise to wealthy hand-to-mouth households, and the existence of mortgage financing allows for households to be both relatively poor and have high exposures to changes in the interest rate. I find that the aggregate direct response of consumption to a real interest rate shock is highly dependent on the type of mortgage contracts available and the possibility to refinance. In an economy with fixed-payment long-term mortgages, the transmission of monetary policy through a cash-flow effect of mortgagors is present, though muted. In an economy with adjustable-rate mortgages, on the other hand, the aggregate direct response of consumption to a real interest rate shock is significantly larger than in a comparable model without housing and mortgages. A broad conclusion is that a detailed understanding of the contract structures in the mortgage market is an important input into the analysis of monetary policy.
“Costly Reversals of Bad Policies: the Case of the Mortgage Interest Deduction”
R&R Review of Economic Dynamics
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.
“Inertia of Dominated Pension Investments: Evidence from an Information Intervention”
With Louise Lorentzon
In this paper we empirically investigate potential causes of imperfect competition in the fund market, as characterized by high price dispersion among comparable funds. We discriminate between three main hypotheses on the demand side: a lack of awareness of price dispersion, search costs, and financial illiteracy. A large-scale field experiment is conducted where information letters are sent to pension savers in two dominated funds in the Swedish premium pension system. We show that an information intervention that increases awareness of dominating funds, and reduces search costs to find such alternatives, can significantly improve households’ real investment choices. Nonetheless, a majority of savers who receive information about the name of the dominating fund do not switch funds. We conclude that the high degree of inertia in pension investments remains even when search friction for identifying dominating alternatives are eliminated.