Financial innovation and deregulation have given households an unprecedented ability to access home equity. To what extent is this beneficial? On one hand, access to home equity enables households to better smooth consumption and self-insure against risk. On the other hand, if housing acts as a savings commitment device, then more liquidity may weaken commitment. In this paper, we evaluate the costs and benefits of greater access to home equity by estimating a model that captures these two opposing channels. Model estimates are validated using a reform that abruptly legalized home equity withdrawal in Texas. In both the data and the model, we observe a 3% increase in nondurable consumption following the reform. According to our estimates, weakened commitment and consumption smoothing each account for half of the observed increase in consumption. Finally, we find that the cost of weakened commitment dominates and that welfare has declined due to the introduction of home equity withdrawal.

Insurance has an intertemporal aspect as insurance premia have to be paid up front. We argue that the financing of insurance is key to understanding basic insurance patterns and insurers' balance sheets. Limited enforcement implies that insurance is globally monotone increasing in household net worth and income, incomplete, and precautionary. These results hold in economies with income risk, durable goods and collateral constraints, and durable goods price risk, under quite general conditions. In equilibrium, insurers are financial intermediaries with collateralized loans as assets and diversified portfolios of insurance claims as liabilities. Collateral scarcity lowers the interest rate, reduces insurance, and increases inequality.

How do households form their inflation expectations? We show the price changes individual consumers observe while shopping are a key determinant of their expectation for overall inflation. We use individual non-durable consumption choices in the Nielsen Homescan Panel to construct household-level measures of perceived inflation. We find perceived price changes help explain inflation expectations across individuals and within individuals over time. The frequency of purchases not the expenditure share determines the importance of perceived price changes for inflation expectations. The effect is stronger for individuals that shop less frequently, and hence are more likely exposed to several and larger price changes in their typical shopping trip. The effect is also stronger for individuals whose uncertainty about inflation is higher and who self report to not rely on the media when forming expectations. Because individual inflation expectations shape economic decisions, central banks' focus on core inflation instead of the heterogeneous price changes in households' non-durable bundles might lead to systematic policy mistakes.

Intertemporal substitution is at the heart of modern macroeconomics and finance as well as economic policymaking, but a large fraction of a representative population of men – those below the top of the distribution by cognitive abilities (IQ) – do not change their consumption propensities with their inflation expectations. Low-IQ men are also less than half as sensitive to interest-rate changes when making borrowing decisions. Our microdata include unique administrative information on cognitive abilities, as well as economic expectations, consumption and borrowing plans, and total household debt from Finland. Heterogeneity in observables such as education, income, other expectations, and financial constraints do not drive these patterns. Costly information acquisition and the ability to form accurate forecasts are channels that cannot fully explain these results. Limited cognitive abilities could be human frictions in the transmission and effectiveness of fiscal and monetary policies that operate through household consumption and borrowing decisions.