“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”
Revise & Resubmit, Quantitative Economics
(Job Market Paper, Winner of the UniCredit Foundation Best Paper Award at VMACS CopenhagenMacro Days)
Housing and mortgage choices are among the largest financial decisions households make and they substantially impact households’ liquidity. This paper explores how monetary policy affects aggregate demand by influencing these portfolio choices. To quantify this 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 adjust their housing and mortgage holdings in response to an expansionary monetary policy shock, these households account for 50 percent of the increase in aggregate demand. Mortgage refinancing explains approximately two thirds of the contribution, whereas adjusted housing choices account for one third—uncovering a new transmission channel. I also show that the pass-through of the policy rate to mortgage interest rates significantly affects the response in house prices and aggregate demand. Moreover, the different pass-through to short and long mortgage rates drives the difference in the aggregate demand response between economies with predominantly adjustable-rate mortgages and economies with fixed-rate mortgages.
“Dominated pension investments: the role of search frictions and unawareness”
With Louise Lorentzon
The market for long-term savings in mutual funds is characterized by high price dispersion between similar funds. We conduct a large-scale field experiment in the Swedish pension system to examine to what extent information and search frictions can explain why savers choose high-fee index funds, i.e., dominated funds. Our results show that information letters that increase awareness of a dominated choice and reduce search costs to find the dominating alternative improve many savers’ real investment choices and can be justified from a cost-benefit analysis. Moreover, we find that a lack of awareness and search costs account for at most 45 percent of dominated fund holdings.
This paper studies how down-payment requirements for house purchases affect household consumption. We show that the marginal propensity to consume (MPC) increases for some households and decreases for others as a result of stricter down-payment regulations, which stands in sharp contrast to the positive relationship between MPC and a traditional borrowing constraint. We also show that the mean MPC in the economy is U-shaped in the down-payment constraint, a finding that rests on an important interaction with the traditional borrowing limit. To quantify this relationship, we construct an incomplete-markets heterogeneous-household model, calibrated to the U.S. economy. We find that the mean MPC is minimized at a down-payment constraint of 40 percent, which is associated with a 5 percent reduction in the mean MPC from its current level. Moreover, we show that the effectiveness of monetary policy is reduced under stricter down-payment requirements and fiscal transfers have a larger impact if targeting low-income households.