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Prof. Gisle James Natvik

BI Norwegian Business School, Norway

Abstract: When higher inflation pushes nominal interest rates up, mortgage payment schedules become more front-loaded. This is the inflation tilt effect. Using Norwegian micro data, we quantify the magnitude and distribution of tilt effects across households, and estimate the extent to which they impact saving. Tilt effects are large among young and middle-aged households with high debt and high income, and pass through to their saving. We estimate that for every dollar that inflation increases scheduled current mortgage payments, households increase their real saving by 70 cents on average. We assess the welfare consequences of inflation tilt effects within a heterogeneous-household life-cycle model with adjustable-rate mortgages and borrowing constraints. The model implies that higher inflation makes constrained households with large mortgages gain wealth, but lose welfare, as they are forced to save more.