Financial Choice and Public Policy

Sammanfattning: Costly reversals of bad policies: the case of the mortgage interest deductionThis 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. Monetary policy and the mortgage marketThis paper quantifies the role of changes in mortgage interest rates and house prices in the transmission of monetary policy. I build a heterogeneous-agent life-cycle model with housing and long-term mortgage contracts. The illiquid nature of housing gives rise to wealthy hand-to-mouth households, and the existence of mortgage financing allows for households to be both relatively poor and have high exposures to changes in the interest rate. I find that the aggregate response of consumption to a real interest rate shock is highly dependent on the type of mortgage contracts available and the possibility to refinance. In an economy with adjustable-rate mortgages, the consumption response is more than six times as large as compared to when fixed-rate mortgages are used. Hence, a detailed understanding of the contract structures in the mortgage market is an important input into the analysis of monetary policy. Mortgage lending standards: implications for consumption dynamicsIn this paper, we investigate to what extent stricter mortgage lending standards affect households' ability to smooth consumption. Using a heterogeneous-household model with incomplete markets, we find that a permanently lower loan-to-value (LTV) or payment-to-income (PTI) requirement only marginally affects the aggregate consumption response to a negative wealth shock. We show that even the distribution of marginal propensities to consume across households is remarkably insensitive to these permanent policies. In contrast, households’ consumption responses can be reduced if a temporary stricter LTV or PTI requirement is implemented prior to a negative wealth shock. However, strong assumptions need to be made for temporary policies to be welfare improving. Inertia of dominated pension investments: evidence from an information interventionThe market for long-term savings in mutual funds is characterized by high price dispersion between similar funds. In this paper, we conduct an empirical investigation into possible causes of imperfect competition in this market. We discriminate between three main hypotheses on the demand side: a lack of awareness of price dispersion, search costs, and financial illiteracy. We run a large-scale field experiment in the Swedish public pension system, where information letters are sent to savers in two dominated index funds. We show that an information intervention that increases the awareness of a cheaper, dominating fund, at the same time as it reduces the search costs for finding such an alternative, can significantly improve households' real investment allocations. Nonetheless, a majority of savers who are sent information about the name of the dominating fund do not switch funds. Thus, the high degree of inertia in pension investments remains even when search frictions for identifying dominating alternatives are eliminated.