Present bias amplifies the household balance-sheet channels of macroeconomic policy

Maxted, Peter, Laibson, David and Moll, Ben ORCID: 0009-0003-6067-359X (2024) Present bias amplifies the household balance-sheet channels of macroeconomic policy. Quarterly Journal of Economics. ISSN 0033-5533 (In Press)

Text (LaibsonMaxtedMollPresentBias) - Accepted Version Pending embargo until 1 January 2100. Download (2MB)

Abstract

We study the effect of monetary and fiscal policy in a heterogeneous-agent model where households have present-biased time preferences and naive beliefs. The model features a liquid asset and illiquid home equity, which households can use as collateral for borrowing. Because present bias substantially increases households’ marginal propensity to consume (MPC), present bias increases the effect of fiscal policy. Present bias also amplifies the effect of monetary policy, but at the same time, slows down the speed of monetary transmission. Interest rate cuts incentivize households to conduct cash-out refinances, which become targeted liquidity injections to high-MPC households. Present bias also introduces a motive for households to procrastinate refinancing their mortgages, which slows down the speed with which this monetary channel operates.

Item Type:	Article
Additional Information:	© 2024 The Author
Divisions:	Economics
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
JEL classification:	E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E60 - General
Date Deposited:	10 Sep 2024 09:00
Last Modified:	19 Nov 2024 12:12
URI:	http://eprints.lse.ac.uk/id/eprint/123935

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