Working Paper: NBER ID: w29094
Authors: David Laibson; Peter Maxted; Benjamin Moll
Abstract: We study the effects 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 impact 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. But present bias also introduces a motive for households to procrastinate refinancing their mortgages, which slows down the speed with which this monetary channel operates.
Keywords: Present Bias; Macroeconomic Policy; Household Finance; Consumption; Investment
JEL Codes: D14; D15; E03; E2; E21; E5; E62; E71; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| present bias (D15) | households' marginal propensity to consume (MPC) (D19) |
| households' marginal propensity to consume (MPC) (D19) | fiscal policy effectiveness (E62) |
| present bias (D15) | monetary policy effect (E52) |
| present bias (D15) | speed of monetary transmission (E50) |
| interest rate cuts (E43) | cash-out refinances (G51) |
| cash-out refinances (G51) | liquidity injections to high-MPC households (E51) |
| present bias (D15) | procrastination in refinancing mortgages (G51) |
| procrastination in refinancing mortgages (G51) | slowdown in monetary policy impact (E52) |
| present bias (D15) | buildup of liquidity-constrained households (G59) |