Household Debt and Monetary Policy: Revealing the Cash-Flow Channel
with Martin Flodén, Jósef Sigurdsson and Roine Vestman (Economic Journal, 2021). Slides
Abstract: We examine the effect of monetary policy on household spending when households are indebted and interest rates on outstanding loans are linked to short-term interest rates. Using administrative data on balance sheets and consumption expenditure of Swedish households, we reveal the cash-flow transmission channel of monetary policy. On average, indebted households reduce consumption spending by an additional 0.25-0.35 percentage points in response to a one-percentage-point increase in the policy rate, relative to a household with no debt. This is true among households with low or high levels of illiquid wealth, such as homeowners, who hold disproportionally little liquid wealth and display hand-to-mouth behavior when faced with increased interest expenses. We show that these responses are driven by households that have some or a large share of their debt in contracts where interest rates vary with short-term interest rates, such as adjustable-rate mortgages (ARMs), which implies that monetary policy shocks are quickly passed through to interest expenses.
Abstract: We study a Danish reform in 2002 that lowered the ex-ante probability of refugees receiving permanent residency by prolonging the time period before they were eligible to apply for such residency. Adherence to the new rules was entirely determined by the date of the asylum application and the reform was implemented retroactively. We formulate a simple search and matching model to derive predictions that can be tested using our data. Using registry based data on individuals in Denmark, we then study the effects on labor-market outcomes and investments in education. While proponents of temporary protection regimes often argue that stronger incentives to qualify for residency based on labor-market attachment will speed up the process of entering the labor market, our main result is that we find no evidence of positive effects on labor-market outcomes at any horizon. We emphasize the need for further research on this topic to better understand the effects of these types of policies.
Work in progress:
Portfolio and Housing Decisions in the Presence of Intergenerational Links (draft available upon request).
Abstract: I set up a partial equilibrium overlapping-generations model with intergenerational linkages, where parents and children are (imperfectly) altruistically linked, and study housing and portfolio decisions. There is predetermined heterogeneity in parents’ housing tenure status, in that parents can be either renters or homeowners, whereas children choose their housing tenure status. I use the model to characterize individual behavior, as well as behavioral responses to a change in borrowing conditions. In steady state, the main determinant of both children’s and parents’ behavior is parental wealth, and stricter borrowing conditions have a limited effect. During a transition with positive house price growth, however, the difference between parents who are homeowners and renters, and between their children, is amplified, and stricter borrowing conditions have a stronger impact on behavior.
with Paula Roth (draft available upon request).
Abstract: We study the role of risk-sharing in facilitating innovation. Studying entrepreneurship and innovation entails modelling an occupational choice and an effort choice. Risk-sharing may increase the number of individuals who become entrepreneurs by limiting the downside risk. The effort of entrepreneurs may, however, be hampered by high risk-sharing if this limits the returns faced by successful entrepreneurs relative to unsuccessful entrepreneurs. We construct a theoretical model where risk-sharing may be private or public, i.e., provided through the welfare state by means of taxation. We show that the level of risk-sharing matters for the characteristics of entrepreneurs. Moreover, high taxes, which imply high equilibrium benefits paid out to unsuccessful entrepreneurs, encourage entrepreneurship but discourage effort.
Indebtedness in various age groups in Sweden (with Johan Eng Larsson and Kerstin Hallsten at Sveriges Riksbank).  Staff Memo March 2018.
The Indebtedness of Young Households (with Johan Eng Larsson and Peter van Santen at Sveriges Riksbank). Forthcoming.