Present bias amplies the household balance-sheet channels of macroeconomic policy

We study the eect of monetary and scal policy in a heterogeneous-agent model where households have present-biased time preferences and naive beliefs. The model features a liquid asset and illiquid home equity, which households can use as collateral for borrowing. Because present bias substantially increases households' marginal propensity to consume (MPC), present bias increases the impact of scal policy. Present bias also amplies the eect of monetary policy but, at the same time, slows down the speed of monetary transmission. Interest rate cuts incentivize households to conduct cash-out renances, which become targeted liquidity-injections to high-MPC households. But present bias also introduces a motive for households to procrastinate renancing their mortgages, which slows down the speed with which this monetary channel operates.