Mads Rahbek Jørgensen defends his PhD thesis at the Department of Economics

Candidate:

Mads Rahbek Jørgensen, Department of Economics, University of Copenhagen

Title:

Essays on Household Finance

Supervisors:

• Asger Lau Andersen, Associate Professor, Department of Economics, University of Copenhagen
• Niels Johannesen, Professor, Department of Economics, University of Copenhagen
• Louise Aggerstrøm Hansen, Chief Analyst, Danske Bank

Assessment Committee:

• Amalie Sofie Jensen, Associate Professor, Department of Economics, University of Copenhagen
• Roine Vestman, Professor, Department of Economics, Stockholm University
• Andreas Fagereng, Professor, Department of Finance, BI Norwegian Business School 

Summary:

This dissertation examines households’ consumption behavior using high-frequency transactional data from Danske Bank. It consists of three chapters. The first chapter studies how the tightness of liquidity constraints shaped households’ responses to a fiscal stimulus policy in Denmark in 2020, which converted illiquid wealth into liquid wealth available for consumption. The second chapter revisits the retirement consumption puzzle and examines how households’ spending responds to retirement. The third chapter focuses on how households with adjustable-rate mortgages responded to rising interest rates in 2022, and whether their responses were guided by current mortgage payments or by expectations about future mortgage payments.

Chapter 1: Fiscal Stimulus and Liquidity Constraint Tightness

Evidence from High-Frequency Transactional Data

This chapter examines household consumption responses to a unique fiscal stimulus policy in Denmark that temporarily allowed withdrawals from illiquid accounts in October and November of 2020. Using granular transaction and account-level data from the country’s largest retail bank, I estimate marginal propensities to consume (MPCs) and analyze heterogeneity in spending behavior. The aggregate MPC out of withdrawn funds is modest, 11.1% within eight weeks after payout. This muted effect reflects the policy’s design, which concentrated large payouts among high-income households with ample liquidity. Households facing tight liquidity constraints exhibit MPCs exceeding 40%, while unconstrained households show MPCs near 6%. Stratified analyses confirm that liquidity constraint tightness, rather than income, age, or payout size, drives heterogeneity in spending responses. These findings underscore the central role of liquidity constraints in shaping consumption responses to transitory shocks and highlight the importance of targeting in fiscal policy design if the aim is to maximize effects on short-run aggregate demand.

Chapter 2: The Retirement Consumption Puzzle Revisited

New Evidence on an Old Conundrum

The retirement consumption puzzle, the observed decline in household spending at retirement, poses a challenge to the life-cycle hypothesis, which predicts smooth consumption over predictable life events. Numerous studies across countries relying on linear regression or fixed effects model report spending drops at retirement. However, recent evidence using regression discontinuity designs find no decline in spending when retirement coincides with statutory retirement ages. This raises questions about the underlying mechanisms behind the observed declines in spending. This chapter revisits the puzzle using high-frequency transactional data from Danish households. The analysis replicates previous findings in the literature. Estimates from linear and fixed effects models indicate a decline in spending at retirement among Danish retirees. Estimates from a regression discontinuity approach exploiting the discontinuity in retirement status at Denmark’s statutory retirement age show no effect of retirement on spending. Further investigation reveals that spending declines occur primarily among households retiring outside the statutory retirement age, often involuntarily, and are concentrated among those with low wealth and large income losses at retirement. These findings reconcile conflicting results in the literature and highlights the importance of distinguishing between planned and unplanned retirement transitions. The evidence show that the puzzle is not intrinsic to retirement itself but reflects financial vulnerability and shocks associated with involuntary retirement. This nuance has important implications for assessing retirement preparedness and designing targeted policy interventions addressing inadequate pension savings.

Chapter 3: Consumption Responses to Rising Mortgage Rates

Unpacking the Cash-Flow Channel of Monetary Policy

Co-authored with Asger Lau Andersen, Andreas Jakobsen, and Niels Johannesen

How do households with adjustable-rate mortgages respond to rising interest rates, and are the responses guided by current mortgage payments or by expectations about future mortgage payments? This chapter uses granular customer data from the largest bank in Denmark to address these questions in the context of the dramatic rise in interest rates in the first half of 2022. First, to identify the effect of current payments, we compare two highly similar groups of households who – due to decisions made five-ten years earlier – differ in the timing of interest rate reset on their adjustable-rate mortgages. We find that the two groups remain on parallel spending trajectories when one group – and not the other – experiences a sharp increase in interest payments. Our estimates suggest that each additional dollar of current mortgage payments reduces spending by only 1 cent and that liquid buffers absorb the vast majority of the increased expenditure. Second, to identify the effect of expectations about future payments, we compare a treatment group of households with adjustable-rate mortgages to a control group with fixed-rate mortgages. We focus on spending behavior in the pre-reset period where market expectations about future rates are increasing, but current mortgage payments are unchanged. During this period, the treatment group – who is exposed to a future interest reset – reduces spending differentially compared to the control group, who is not. Our estimates suggest that each additional dollar of expected future mortgage payments reduces current spending by more than 15 cents. Overall, the evidence is consistent with forward-looking households who reduce spending and increase the savings rate in anticipation of future increases in their mortgage payments and use liquid buffers to smooth spending.

An electronic copy of the dissertation can be requested here: lema@econ.ku.dk