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Financial intermediation, house prices, and the welfare effects of the U.S. Great Recession

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  • Menno, Dominik
  • Oliviero, Tommaso

Abstract

This paper quantifies the welfare costs of the Great Recession in the United States and their distribution between borrowing and saving households. We use a calibrated dynamic general equilibrium model with shocks to aggregate income and to the financial intermediation sector. The model matches the boom-bust cycle in house prices, the dynamics of household leverage, and the increase in inequality of wealth observed in the U.S. after 2007. We find large welfare costs for financially constrained households, the borrowers. Savers instead benefited from a redistribution of housing wealth due to the de-leveraging of borrowers caused by the plunge in house prices. This redistribution mechanism was exacerbated by the financial intermediation shock. We also show that the welfare costs for borrowers would have been lower if aggregate leverage had remained at pre-2001 levels.

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  • Menno, Dominik & Oliviero, Tommaso, 2020. "Financial intermediation, house prices, and the welfare effects of the U.S. Great Recession," European Economic Review, Elsevier, vol. 129(C).
    • Handle: RePEc:eee:eecrev:v:129:y:2020:i:c:s0014292120301987
    DOI: 10.1016/j.euroecorev.2020.103568
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    2. Lang, Jan Hannes & Menno, Dominik, 2023. "The state-dependent impact of changes in bank capital requirements," Working Paper Series 2828, European Central Bank.
    3. Paccagnini, Alessia, 2019. "Did financial factors matter during the Great Recession?," Economics Letters, Elsevier, vol. 174(C), pages 26-30.
    4. Alessia Paccagnini, 2017. "Forecasting with FAVAR: macroeconomic versus financial factors," NBP Working Papers 256, Narodowy Bank Polski.
    5. Ferrero, Andrea & Harrison, Richard & Nelson, Benjamin, 2018. "House Price Dynamics, Optimal LTV Limits and the Liquidity Trap," CEPR Discussion Papers 13400, C.E.P.R. Discussion Papers.
    6. Sewon Hur, 2018. "The Lost Generation of the Great Recession," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 179-202, October.
    7. Ferrari, Alessandro, 2020. "Losers amongst the losers: the welfare effects of the Great Recession across cohorts," Working Paper Series 2509, European Central Bank.

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    More about this item

    Keywords

    Housing wealth; Heterogeneous agents; Welfare; Leverage;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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