Sources of Inaction in Household Finance: Evidence from the Danish Mortgage Market

We build an empirical model to attribute delays in mortgage refinancing to psychological costs inhibiting refinancing until incentives are sufficiently strong; and behavior, potentially attributable to information-gathering costs, lowering the probability of household refinancing per unit time at any incentive. We estimate the model on administrative panel data from Denmark, where mortgage refinancing without cash-out is unconstrained. Middle-aged and wealthy households act as if they have high psychological refinancing costs; but older, poorer, and less-educated households refinance with lower probability irrespective of incentives, thereby achieving lower savings. We use the model to understand frictions in the mortgage channel of monetary policy transmission. (JEL E52, G21, G51, R31)

Public Interest Payments and Bond Yields: A Panel Data Estimation for the Eurozone

Governments with high public debt risk that investors raise doubts about their ability to repay their debt since interest payments constitute an increasing share of public budgets. High interest payments may then fuel bond yields on secondary markets and subsequently lead to rising refinancing costs. This could precipitate a self-fulfilling prophecy according to which investors’ doubts about a default make the default more probable. Although there already are extensive research results on determinants of bond yields, the role of governments’ interest payments has not been duly taken into account. This paper tests whether the size of public interest payments had an influence on government bond yields during the European debt crisis. There seems to be indeed evidence that higher interest quotas and increasing interest-growth differentials entail higher bond yields.

Mexico’s orthodox budget will face pressures

Significance Mexico’s new government submitted its 2019 economic package to Congress on December 15, including the budget and revenue legislation, and macroeconomic assumptions and projections. Aggregate figures show no departure from the fiscal orthodoxy of recent decades. The proposed spending reshuffle is nevertheless significant, involving ambitious projects that may bring undue fiscal pressures. Impacts AMLO will pursue new investment projects and social programmes as soon as possible. Further jolts to investor confidence would increase country risk perceptions, pushing up debt refinancing costs. Additional economic policy measures seeking to boost long-term growth are likely in 2019.

The Influence of Firm Maturation on Tax-Induced Financing and Investment Decisions

Empirical evidence that taxes influence firms' capital structures has been elusive. Scholes and Wolfson (1989) argue that refinancing costs that accumulate with age affect the time-series variation in firms' tax-induced financing and investment policies. Specifically, they predict that as capital structures gradually become more constrained over time, firms' financing decisions will become less sensitive to their marginal tax rates; and that as firms are increasingly impeded from adjusting their capital structures, they will resort to relying more on investmentrelated tax shields. This study examines panel data spanning firms' first nine public years that provides strong, robust evidence that the evolution in debt and asset tax shields is consistent with Scholes and Wolfson's (1989) predictions. In separate tests, age is measured from a firm's initial public offering and from its incorporation to consider whether the duration of their public and private existence, respectively, affects tax shield choice.

The Influence of Firm Maturation on Firms' Rate of Adjustment to Their Optimal Capital Structures

Extant empirical research on firms' adjustment to their optimal capital structures is cross-sectional. However, Scholes and Wolfson (1989) argue that refinancing costs that accumulate with age increasingly impede firms from restoring their optimal capital structures. This study provides evidence on the time-series variation in the rate at which firms move toward their leverage targets that is consistent with this prediction. In separate tests, age is measured from two dates—from firms' initial public offerings and from their incorporation—to examine whether the duration of their public and private experience, respectively, affect the evolution in financial policies. This paper contributes to the literature by developing a research design that isolates the influence of dynamic refinancing costs on the leverage adjustment problem. The evidence also justifies future research on Scholes and Wolfson's (1989) predictions about the time-series pattern in firms' tax shields by empirically validating that refinancing costs increasingly constrain their capital structures.