Working papers

Abstract


We examine the effect of monetary policy on household spending when households are indebted and interest rates on outstanding loans are linked to short-term interest rates. Using administrative data on balance sheets and consumption expenditure of Swedish households, we reveal the cash-flow transmission channel of monetary policy. On average, indebted households reduce consumption spending by an additional 0.23–0.55 percentage points in response to a one-percentage-point increase in the policy rate, relative to a household with no debt. We show that these responses are driven by households that have some or a large share of their debt in contracts where interest rates vary with short-term interest rates, such as adjustable-rate mortgages (ARMs), which implies that monetary policy shocks are quickly passed through to interest expenses.





Abstract


We exploit a volcanic “experiment” to study the costs and benefits of geographic mobility. In our experiment, a third of the houses in a town were covered by lava. People living in these houses were much more likely to move away permanently. For the dependents in a household (children), we estimate that being induced to move by the “lava shock” dramatically raised lifetime earnings and education. Yet, the benefits of moving were very unequally distributed across generations: the household heads (parents) were made slightly worse off by the shock. These results suggest large barriers to moving for the children, which imply that labor does not flow to locations where it earns the highest returns. The large gains from moving for the young are surprising in light of the fact that the town affected by our volcanic experiment was (and is) a relatively high income town. We interpret our findings as evidence of the importance of comparative advantage: the gains to moving may be very large for those badly matched to the location they happened to be born in, even if differences in average income are small.





Abstract


We examine the effect of monetary policy on household spending when households are indebted and interest rates on outstanding loans are linked to short-term interest rates. Using administrative data on balance sheets and consumption expenditure of Swedish households, we reveal the cash-flow transmission channel of monetary policy. On average, indebted households reduce consumption spending by an additional 0.23–0.55 percentage points in response to a one-percentage-point increase in the policy rate, relative to a household with no debt. We show that these responses are driven by households that have some or a large share of their debt in contracts where interest rates vary with short-term interest rates, such as adjustable-rate mortgages (ARMs), which implies that monetary policy shocks are quickly passed through to interest expenses.





Publications

Time-Dependent or State-Dependent Wage-Setting? Evidence from Periods of Macroeconomic Instability

Journal of Monetary Economics, 2016. Vol. 78, 50-66, with Rannveig Sigurdardottir

Publisher's Version | Online Appendix   

Media coverage: Centralbanking.com 

Abstract


We examine the effect of monetary policy on household spending when households are indebted and interest rates on outstanding loans are linked to short-term interest rates. Using administrative data on balance sheets and consumption expenditure of Swedish households, we reveal the cash-flow transmission channel of monetary policy. On average, indebted households reduce consumption spending by an additional 0.23–0.55 percentage points in response to a one-percentage-point increase in the policy rate, relative to a household with no debt. We show that these responses are driven by households that have some or a large share of their debt in contracts where interest rates vary with short-term interest rates, such as adjustable-rate mortgages (ARMs), which implies that monetary policy shocks are quickly passed through to interest expenses.





Research in Progress 

How Behavioral is consumption?

with Emi Nakamura and Jón Steinsson 

Dropping Out to Work: The Cleansing Effect of Temporary Opportunities on Education Attainment

Abstract


Do tight labor market conditions have persistent effect on real wages and, if so, are higher wages associated with higher risk of layoff in recessions? This paper provides new answers to these two important questions. Using employer-employee data on wages and employment in Iceland prior to and during the Great Recession, I find that labor market conditions at the beginning and during employment spells have persistent effects on real wages. Furthermore, I find that this downward real wage rigidity has allocative consequences for employment. Workers that were hired at times of favorable labor market conditions and thus have higher wages face significantly higher probability of job loss in recessions. These results indicate that higher entry-level wages reflect cyclicality and downward persistence of rents rather than differences in human capital accumulation or match quality.





Real Wage Persistence and Job Displacement in Recessions

Abstract


Do tight labor market conditions have persistent effect on real wages and, if so, are higher wages associated with higher risk of layoff in recessions? This paper provides new answers to these two important questions. Using employer-employee data on wages and employment in Iceland prior to and during the Great Recession, I find that labor market conditions at the beginning and during employment spells have persistent effects on real wages. Furthermore, I find that this downward real wage rigidity has allocative consequences for employment. Workers that were hired at times of favorable labor market conditions and thus have higher wages face significantly higher probability of job loss in recessions. These results indicate that higher entry-level wages reflect cyclicality and downward persistence of rents rather than differences in human capital accumulation or match quality.





Abstract


We exploit a volcanic “experiment” to study the costs and benefits of geographic mobility. In our experiment, a third of the houses in a town were covered by lava. People living in these houses were much more likely to move away permanently. For the dependents in a household (children), we estimate that being induced to move by the “lava shock” dramatically raised lifetime earnings and education. Yet, the benefits of moving were very unequally distributed across generations: the household heads (parents) were made slightly worse off by the shock. These results suggest large barriers to moving for the children, which imply that labor does not flow to locations where it earns the highest returns. The large gains from moving for the young are surprising in light of the fact that the town affected by our volcanic experiment was (and is) a relatively high income town. We interpret our findings as evidence of the importance of comparative advantage: the gains to moving may be very large for those badly matched to the location they happened to be born in, even if differences in average income are small.





Policy Papers and Working Papers Not Intended for Publication