Costly reversals of bad policies: The case of the mortgage interest deduction

Markus Karlman, Karin Kinnerud & Kasper Kragh-Sørensen

Cover of journal Review of Economic Dynamics

Published in:

Review of Economic Dynamics, 2020

DOI: 10.1016/j.red.2020.08.003

Abstract

This paper measures the welfare effects of removing the mortgage interest deduction under a variety of implementation scenarios. To this end, we build a life-cycle model with heterogeneous households calibrated to the U.S. economy, which features long-term mortgages and costly refinancing. In line with previous research, we find that most households would prefer to be born into an economy without the deductibility. However, when we incorporate transitional dynamics, less than forty percent of households are in favor of a reform and the average welfare effect is negative. This result holds under a number of removal designs.

Published Sep. 18, 2020 11:13 AM - Last modified Dec. 16, 2020 3:42 PM