Research

Abstract: A sharp rise in mortgage rates has “locked-in” fixed-rate borrowers, hampering relocations, escalating prices, and reshaping market outcomes. This phenomenon has implications for financial institutions, mortgage lenders, policymakers, and real estate professionals. Using a representative nationwide dataset, we find the probability of a home sale declines by 18.1% with each percentage point increase in the difference between current market rates and a homeowner’s fixed rate. This lock-in effect coincides with higher home prices and an estimated 1.72 million fewer transactions between 2022Q2 and 2024Q2, disproportionately affecting first-time buyers and lower-income households. By restricting supply when rates rise, mortgage rate lock-in introduces a supply-side channel through which reduced transaction volume can dampen or partially offset the usual price response to higher interest rates. Integrating a theoretical framework that accounts for accidental landlords and uses borrower-level evidence, we show mortgage contract structure shapes equilibrium housing market dynamics during periods of rapidly changing financial conditions. The findings provide a basis for researchers and practitioners in finance and real estate to assess the broader economic and systemic consequences of interest rate lock-in.

This paper studies how mortgage debt shapes the consumption response to cash transfers using an incomplete markets model with housing and long-term debt. Among homeowners, the model predicts those with mortgage debt have an average spending response over ten times larger than those without debt, and higher levels of leverage are associated with larger increases in spending. Responses in the model are found to be poorly correlated with income. By excluding many homeowners with debt, conditioning transfers on having low income reduces their efficacy in increasing aggregate spending. The opposite is predicted by a conventional heterogeneous agent model.

This paper studies the accumulation of external public debt in low-income countries (LICs) after receiving debt relief from multilateral lenders. While LICs who received debt relief from the International Monetary Fund in the early 2000s generally lowered their external debt in the initial years of relief, many experienced fast resurgence in debt after borrowing limits were lifted in 2006. Using a difference-in-differences model, we find countries that benefited from the relaxation are more likely to experience a significant increase in their debt-to-GDP ratio. We quantitatively evaluate the effects of debt limit relaxation using a model of sovereign default with two types of debt: subsidized loans from multilateral institutions and non-concessional loans from the private market. The model is calibrated using data from Mozambique prior to its default in 2016, and we find that an impatient government is necessary to match the data on debt accumulation and investment. In the calibrated model, lifting limits on non-concessional borrowing results in an approximately 3 percent loss in households' consumption-equivalent welfare. Meanwhile, the welfare benefits of relaxing borrowing limits with a counter-factually patient government are about half are large.

Abstract: This paper studies optimal dynamic income taxation in a life cycle model with differentiated skills. Imperfect substitution in worker types gives rise to spillover effects in general equilibrium wages from higher aggregate output. A novel Monte Carlo method is developed using multilayered neural networks to compute optimal history-dependent income taxes within a very general class of tax functions. The welfare gains from history-dependent taxation are found to be large, equivalent to a 2 percent increase in lifetime consumption compared to the optimal tax on current income. The welfare gains are found to be close to zero without these features.