Self-imposed liquidity constraints via voluntary debt repayment

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Journal Title
Journal ISSN
Volume Title
A1 Alkuperäisartikkeli tieteellisessä aikakauslehdessä
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Date
2023-11
Major/Subject
Mcode
Degree programme
Language
en
Pages
20
1-20
Series
Journal of Financial Economics, Volume 150, issue 2
Abstract
Debt-repayment flexibility should help temporarily liquidity-constrained households but not necessarily households struggling to save. In a natural experiment in which households can apply for free mortgage-repayment flexibility, I find that two-thirds of liquidity-constrained applicants with high-cost debt voluntarily restrict flexibility and forgo, on average, 4,070 EUR of low-cost liquidity. An overconsumption tendency reflecting self-control problems can explain the voluntary liquidity restrictions as well as the persistent liquidity constraints, the consumption drop at the predictable end of flexibility, and saving in other illiquid assets. Self-imposed liquidity constraints reflect characteristics instead of circumstances and reduce the potency of debt-forbearance offers in recessions.
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Keywords
Liquidity constraints, Mortgages, Flexibility, Self-control, Commitment, Consumption smoothing
Other note
Citation
Vihriälä, E 2023, ' Self-imposed liquidity constraints via voluntary debt repayment ', Journal of Financial Economics, vol. 150, no. 2, 103708, pp. 1-20 . https://doi.org/10.1016/j.jfineco.2023.103708