The Long Shadows of the Great Inflation: Evidence from Residential Mortgages

97 Pages Posted: 19 Jul 2021 Last revised: 17 Jan 2023

See all articles by Matthew J. Botsch

Matthew J. Botsch

Bowdoin College

Ulrike Malmendier

University of California, Berkeley - Department of Economics; University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

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Date Written: January 14, 2023

Abstract

In most countries, the prevailing type of long-term mortgage is variable rate. In the US, 80% of mortgages have fixed rates, which is hard to explain under the standard life-cycle consumption framework. We link this puzzle to the long-lasting effects of the Great Inflation and show that personal experiences of high interest rates affect interest-rate expectations and mortgage choices. Using the Residential Finance Survey, the Survey of Consumer Finances, and mortgage-rate surveys, we estimate a structural discrete-choice model and quantify the welfare implications. Our simulations imply that Baby Boomers overpaid $22bn for fixed-rate mortgages in the late 1980s and 1990s.

Keywords: Financial contracts, household finance, experience effects, behavioral finance, inflation expectations, mortgage choice

JEL Classification: D14, D83, D84, D91, E31, G41, G51

Suggested Citation

Botsch, Matthew J. and Malmendier, Ulrike, The Long Shadows of the Great Inflation: Evidence from Residential Mortgages (January 14, 2023). Available at SSRN: https://ssrn.com/abstract=3888762 or http://dx.doi.org/10.2139/ssrn.3888762

Matthew J. Botsch (Contact Author)

Bowdoin College ( email )

Brunswick, ME 04011
United States

Ulrike Malmendier

University of California, Berkeley - Department of Economics ( email )

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Berkeley, CA 94720-3880
United States
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HOME PAGE: http://www.econ.berkeley.edu/~ulrike/

University of California, Berkeley - Haas School of Business ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Institute for the Study of Labor (IZA)

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