Research

Publications

"Temptation and Commitment: A Model of Hand-to-Mouth Behavior", with Orazio Attanasio and Agnes Kovacs 

This paper presents a model of consumption behavior that explains the presence of ‘wealthy hand-to-mouth’ consumers using a mechanism that differs from those analyzed previously. We show that a two-asset model with temptation preferences generates a demand for commitment and thus illiquidity, leading to hand-to-mouth behavior even when liquid assets deliver higher returns than illiquid assets. This preference for illiquidity has important implications for consumption behaviour and for fiscal stimulus policies. Our model matches the recent empirical evidence that MPCs remain high even for large income shocks, suggesting a larger response to targeted fiscal stimulus than previously believed.

"Estimating Temptation and Commitment Over the Life-Cycle", with Agnes Kovacs and Hamish Low 

This article estimates the importance of temptation for consumption smoothing and asset accumulation in a life‐cycle model. We use two complementary estimation strategies: first, we estimate the model‐implied Euler equation; second, we match liquid and illiquid wealth accumulation using the method of simulated moments. In both cases, we find that the utility cost of temptation is one‐quarter of the utility benefit of consumption. Further, temptation is crucial for correctly estimating the elasticity of intertemporal substitution (EIS): EIS estimates are biased downward when ignoring temptation. Finally, the model only matches the share of illiquid wealth if temptation is in the preference specification.

"Innovation, Productivity, and Monetary Policy", with Albert Queralto 

To what extent can monetary policy impact business innovation and productivity growth? We use a New Keynesian model with endogenous total factor productivity (TFP) to quantify the TFP losses due to the constraints on monetary policy imposed by the zero lower bound (ZLB) and the TFP benefits of tightening monetary policy more slowly than currently anticipated. In the model, monetary policy influences firms’ incentives to develop and implement innovations. We use evidence on the dynamic effects of R&D and monetary shocks to estimate key parameters and assess model performance. The model suggests significant TFP losses due to the ZLB.

Working Papers

"Mortgage Design, Repayment Schedules, and Household Borrowing", with Claes Backman and Peter van Santen

How does the design of debt repayment schedules affect household borrowing? To answer this question, we exploit a Swedish policy reform that eliminated interest-only mortgages for loan-to-value ratios above 50%. We document substantial bunching at the threshold, leading to 5% less borrowing. Wealthy borrowers drive the results, challenging credit constraints as the primary explanation. We develop a model to evaluate the mechanisms driving household behavior and find that much of the effect comes from households experiencing ongoing flow disutility to amortization payments. Our results indicate that new mortgage contracts with low initial payments substantially increase household borrowing and lifetime interest costs.

"Financial Innovation, the Decline in Household Savings, and the Trade-off between Flexibility and Commitment", with Agnes Kovacs 

This paper investigates the trade-off between two opposing views of financial innovation: the benefit of improved flexibility and the potential cost of weakened commitment. To disentangle their relative importance, we estimate a model of household behavior that allows for the possibility that housing acts as a savings commitment device. Identification is achieved using novel evidence on consumption growth dynamics. Using the estimated model, we study the macroeconomic and welfare implications of giving households greater access to home equity. We find that the welfare cost of weakened commitment is substantial: approximately 1.7 times larger than the benefit of improved consumption smoothing. Both channels contribute equally to a 2.5 percentage point decline in the personal saving rate. Welfare could be improved using alternative mortgage policies that better balance the trade-off between flexibility and commitment.

"Automated Credit Limit Increases and Consumer Welfare" with Vitaly Bord and Agnes Kovacs (March, 2025)

In the United States, credit card companies frequently use machine learning algorithms to proactively raise credit limits for borrowers. In contrast, an increasing number of countries have begun to prohibit credit limit increases initiated by banks rather than consumers. In this paper, we exploit detailed regulatory micro data to examine the extent to which bank-initiated credit limit increases are directed towards individuals with persistent revolving balances. We then develop a model that captures the costs and benefits of regulating proactive credit limit increases, which we use to quantify their importance and evaluate the implications for household well-being.

"Self-Control and Early Withdrawal from Retirement Accounts" with Patrick Schneider 

Using a survey-elicited measure of psychological self-control and a policy change in Australia during Covid-19, we find that self-control issues significantly predict early withdrawals from retirement accounts. Individuals in the top quintile of self-control issues are 60% more likely to withdraw than those in the bottom quintile. Self-control is a stronger predictor of early withdrawal than other behavioral factors such as financial literacy, planning horizons, or personality traits. The effects are economically meaningful: eliminating self-control issues could reduce early withdrawals by 24% --- as large as the effect of adverse income shocks on withdrawals during Covid-19.

"Household Liquidity Policy" with Patrick Schneider 

We assess 'household liquidity policy', a novel approach to stimulating aggregate demand that relies on relaxed regulation instead of conventional fiscal tools. We analyse the effectiveness of these liquidity policies, focusing on a form that was widely used during the Covid--19 pandemic: early access to retirement savings accounts. In a heterogeneous agent model with retirement and present--biased households we find both liquidity and conventional fiscal policies can achieve similar boosts to aggregate consumption but have different distributional implications. Relative to fiscal policy, liquidity policy benefits wealthier workers, retirees, and future generations, due to its lower tax burden and added flexibility, but it is also highly regressive. Liquidity policy shifts the future financial burden of present--day stimulus onto poorer and more present--biased workers, who only feel the impact when it is too late to adjust. 

"Heterogeneity in Household Spending and Well-being on Retirement", with Martin O'Connell, Cormac O'Dea, and Francesca Parodi

We study heterogeneity in spending patterns around the time of retirement. Using rich consumption data from the Panel Study of Income Dynamics, and exploiting within-household variation in spending, we systematically classify households into groups characterized by differences in consumption transitions at retirement.  We decompose the overall spending changes into the contribution made by different sub-components of consumption. We find that the households who increase spending shift their budget away from food and towards transportation, recreation, and trips. In contrast, the households for whom spending falls reduce the budget share spent on transportation and restaurants, while increasing the share allocated to groceries and housing expenditures. Using a life-cycle model, we characterize the mechanisms capable of driving these observed patterns.

"Early Withdrawals and Optimal Liquidity" with Henrik Yde Andersen, Alina Bartscher, and Søren Leth-Petersen

In most countries, retirement wealth is relatively illiquid due to early withdrawal penalties. While policymakers face a trade-off between flexibility and commitment, there is no consensus on the optimal solution to this problem. Exploiting administrative tax data and a natural experiment from Denmark, we document how individuals react to an exogenous reduction in the early withdrawal penalty. Moreover, we show how individuals use early withdrawal from pension accounts to smooth out the financial consequences of negative life events like unemployment. While the empirical results confirm the benefits of flexibility in case of a negative life event, they also suggest that households may be tempted to spend instead of saving for retirement if the penalty is too low. We use a life-cycle model to give a structural interpretation to the data and evaluate alternative policies to optimally balance the trade-off between flexibility and commitment.

"The Heterogeneous Effects of Financial Innovation on Household Spending", with Agnes Kovacs

Discussions

"The Covid-19 Crisis and Consumption" by Dimitris Christelis (Glasgow), Dimitris Georgarakos (ECB), Tulio Jappelli (Naples), Geoff Kenny (ECB)

"Aligning Incentives: The Effect of Mortgage Servicing Rules on Foreclosures and Delinquency" by Ryan Sandler (CFPB)

"Local Fiscal Autonomy: A Spatial Equilibrium Approach using Household Data" by Gabriel Loumeau and Christian Stettler (ETH Zurich)

"Illiquid Homeownership and the Bank of Mom and Dad" by Eirik Eylands Brandsaas (Federal Reserve Board)

Other Writing

"What has happened to consumer spending during the Covid-19 crisis?" with Hamish Low (Oxford)