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Present bias amplifies the household balance-sheet channels of macroeconomic policy

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  • Maxted, Peter
  • Laibson, David
  • Moll, Ben

Abstract

We study the effect of monetary and fiscal policy in a heterogeneous-agent model where households have present-biased time preferences and naive beliefs. The model features a liquid asset and illiquid home equity, which households can use as collateral for borrowing. Because present bias substantially increases households’ marginal propensity to consume (MPC), present bias increases the effect of fiscal policy. Present bias also amplifies the effect of 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 high-MPC households. Present bias also introduces a motive for households to procrastinate refinancing their mortgages, which slows down the speed with which this monetary channel operates.

Suggested Citation

  • Maxted, Peter & Laibson, David & Moll, Ben, 2025. "Present bias amplifies the household balance-sheet channels of macroeconomic policy," LSE Research Online Documents on Economics 123935, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:123935
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    File URL: https://researchonline.lse.ac.uk/id/eprint/123935/
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    1. Julio J. Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Janosch Brenzel-Weiss & Winfried Koeniger & Arnau Valladares-Esteban, 2026. "Tax Incentives, Portfolio Choice, and Macroprudential Risks," Swiss Finance Institute Research Paper Series 26-14, Swiss Finance Institute.
    2. Ufuk Akcigit & Raman Singh Chhina & Seyit M. Cilasun & Javier Miranda & Nicolas Serrano-Velarde, 2025. "Credit Card Entrepreneurs," NBER Working Papers 33618, National Bureau of Economic Research, Inc.
    3. Lu Liu, 2023. "The demand for long-term mortgage contracts and the role of collateral," Bank of England Staff Working Paper series 1009, Bank of England.
    4. Yongheng Hu, 2025. "Heterogeneous Agents in the Data Economy," Papers 2509.09656, arXiv.org.
    5. Michael Boutros, 2022. "Windfall Income Shocks with Finite Planning Horizons," Staff Working Papers 22-40, Bank of Canada.
    6. Giovanni L. Violante & Greg Kaplan, 2022. "The Marginal Propensity to Consume in Heterogeneous Agent Models," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 747-775, August.
    7. Christopher D. Carroll & Edmund Crawley & William Du & Ivan Frankovic & Håkon Tretvoll, 2026. "Welfare and spending effects of consumption stimulus policies," Quantitative Economics, Econometric Society, vol. 17(3), pages 741-790, July.
    8. Badarinza, Cristian & Ramadorai, Tarun & Siljander, Juhana & Tripathy, Jagdish, 2024. "Behavioral Lock-In: Aggregate Implications of Reference Dependence in the Housing Market," CEPR Discussion Papers 19123, Centre for Economic Policy Research.
    9. Acharya, Subas & Jimenez-Gomez, David & Rachinskii, Dmitrii & Rivera, Alejandro, 2026. "Present-bias and the value of sophistication: Splurging vs. smoothing," Games and Economic Behavior, Elsevier, vol. 157(C), pages 186-225.
    10. Gomes, Francisco & Haliassos, Michael & Ramadorai, Tarun, 2026. "New frontiers in household finance," LSE Research Online Documents on Economics 138280, London School of Economics and Political Science, LSE Library.
    11. Liu, Lu, 2023. "The demand for long-term mortgage contracts and the role of collateral," ESRB Working Paper Series 142, European Systemic Risk Board.
    12. Diamond, William & Landvoigt, Tim & Sánchez, Germán Sánchez, 2025. "Printing away the mortgages: Fiscal inflation and the post-covid boom," Journal of Financial Economics, Elsevier, vol. 171(C).
    13. Li, Yuan & Wong, Tak-Yuen & Zhao, Siqi, 2025. "Present bias: Understanding zero leverage policy and unstable capital structure," Journal of Mathematical Economics, Elsevier, vol. 119(C).
    14. Oliver Pfäuti & Fabian Seyrich, 2022. "A Behavioral Heterogeneous Agent New Keynesian Model," CRC TR 224 Discussion Paper Series crctr224_2022_334, University of Bonn and University of Mannheim, Germany.
    15. Fadlon, Itzik & Laibson, David, 2022. "Paternalism and pseudo-rationality: An illustration based on retirement savings," Journal of Public Economics, Elsevier, vol. 216(C).

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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