Gisle Natvik, Norwegian Business School
The inflation tilt effect and household saving
Abstract:
Inflation rotates mortgage payment schedules toward the front, termed the inflation tilt effect. Using Norwegian micro data, we quantify its magnitude, distribution, and pass-through to household saving. Tilt effects are large among high-debt, high-income, middle-aged households. We estimate a mean pass-through from tilt effects to saving around 60 cents to the dollar. The estimate diminishes with household liquidity, but remains above 20 cents even among highly liquid households. In contrast, a calibrated model with housing, realistic mortgage contracts and borrowing constraints predicts a pass-through that is below 10 cents on average and close to zero for households with high liquidity. If we instead impose that tilt effects perturb everyone's saving in line with our estimates, their welfare losses would be small, indicating that our high pass-through estimates are consistent with near-rational behavior. Macroeconomic effects can then be big according to our model: an unexpected temporary rise in inflation by 5 percentage points gives a 1.9 percent aggregate consumption drop from tilt effects alone.
Gisle J. Natvik is a professor of economics at the Norwegian Business School (BI). His main research interests are within macro economics, monetary economics and political economy.
Natvik's work has been published in European Economic Review, International Economic Review, Journal of the European Economic Association, Journal of Money, Credit and Banking, Journal of Public Economics, and other journals.
You can read more about Gisle Natvik here
CEBI contact: Søren Leth-Petersen