Macroeconomics Seminar Series. Financial Innovation, the Decline in Household Savings, and the Trade-off between Flexibility and Commitment
Published: 4 September 2023
5 October. Dr Agnes Kovacs, King's College London
Dr Agnes Kovacs, King's College London
"Financial Innovation, the Decline in Household Savings, and the Trade-off between Flexibility and Commitment"
Thursday, 5 October. 3 pm
Room 223 Advance Research Centre (ARC)
Abstract
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 behaviour that allows for the possibility that housing acts as a savings commitment device. Identification is achieved using novel evidence on consumption growth dynamics. We then use the estimated model to 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.
Bio
I am currently an Assistant Professor at King's College London (on leave from the University of Manchester) and a Research Associate at the Institute for Fiscal Studies. In addition, I am a CEPR Research Affiliate.
My research interests are in household finance and macroeconomics.
For further information, please contact business-school-research@glasgow.ac.uk
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First published: 4 September 2023
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