https://macropaperwarehouse.com/authors/david-laibson/David LaibsonHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/present-bias-amplifies-the-household-balance-sheet-channels-of-macroeconomic-policy/https://macropaperwarehouse.com/papers/present-bias-amplifies-the-household-balance-sheet-channels-of-macroeconomic-policy/<p>Maxted, Laibson, and Moll study fiscal and monetary policy in a partial-equilibrium heterogeneous-agent model in which homeowners have present-biased time preferences (Instantaneous Gratification preferences, the continuous-time limit of quasi-hyperbolic discounting) and naive beliefs, alongside a liquid savings account, an illiquid home, and access to credit card and mortgage debt. Because present bias substantially increases households&rsquo; marginal propensity to consume — in the calibrated model the quarterly MPC rises from 4% under exponential discounting to 14% under present bias, and the quarterly marginal propensity for expenditure (MPX) rises from 13% to 30% — present bias powerfully increases the effect of fiscal stimulus. Present bias also amplifies the overall effect of expansionary 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 households near the liquidity constraint who have especially high MPCs, but present bias with naive beliefs also introduces a motive for households to procrastinate on refinancing their mortgage, which substantially slows the speed at which this channel operates. A noteworthy feature of the model is that present bias amplifies the direct effect of monetary policy on household consumption while simultaneously delivering larger MPCs — a combination that is in contrast to standard heterogeneous-agent models, where modeling choices that amplify MPCs typically deliver smaller consumption responses to interest rate changes. The calibrated present-biased economy also replicates several empirical regularities that are difficult to match with exponential discounting: high-cost credit card borrowing by homeowners, empirically plausible cash-out behavior and loan-to-value ratios, and refinancing inertia.</p>