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

Peter Maxted, David Laibson and Ben Moll

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

JEL-codes: E21 E60 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2025-02-28
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Published in Quarterly Journal of Economics, 28, February, 2025, 140(1), pp. 691 - 743. ISSN: 0033-5533

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