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Self-imposed liquidity constraints via voluntary debt repayment

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  • Vihriälä, Erkki

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.

Suggested Citation

  • Vihriälä, Erkki, 2023. "Self-imposed liquidity constraints via voluntary debt repayment," Journal of Financial Economics, Elsevier, vol. 150(2).
    • Handle: RePEc:eee:jfinec:v:150:y:2023:i:2:s0304405x2300140x
    DOI: 10.1016/j.jfineco.2023.103708
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    More about this item

    Keywords

    Liquidity constraints; Mortgages; Flexibility; Self-control; Commitment; Consumption smoothing;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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