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Welfare implications of the transition to high household debt

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  • Campbell, Jeffrey R.
  • Hercowitz, Zvi

Abstract

Aggressive deregulation of the mortgage market in the early 1980s triggered innovations that greatly reduced indebted households' required home equity, and a borrowing surge followed. This paper uses a calibrated general equilibrium model of lending from the wealthy to the middle class to evaluate the welfare effects of this reform quantitatively. We find that the "indirect" effects of endogenous interest rate and other relative price changes dominate the "direct" effect of relaxing the constraint. The borrowing household's welfare falls even though the reform directly relaxes a constraint on its trade. The saving household's welfare rises substantially.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 56 (2009)
Issue (Month): 1 (January)
Pages: 1-16

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Handle: RePEc:eee:moneco:v:56:y:2009:i:1:p:1-16

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Web page: http://www.elsevier.com/locate/inca/505566

Related research

Keywords: Financial deregulation Mortgage debt Interest rates;

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References

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  1. Ray C. Fair & John B. Taylor, 1980. "Solution and Maximum Likelihood Estimation of Dynamic Nonlinear Rational Expectations Models," Cowles Foundation Discussion Papers 564, Cowles Foundation for Research in Economics, Yale University.
  2. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
  3. Zvi Hercowitz & Jeffrey C. Campbell, 2005. "The Role of Collateralized Household Debt in Macroeconomic Stabilization," 2005 Meeting Papers 120, Society for Economic Dynamics.
  4. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
  5. Benjamin M. Friedman, 1992. "Learning From the Reagan Deficits," NBER Working Papers 4022, National Bureau of Economic Research, Inc.
  6. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory," Review of Economic Studies, Wiley Blackwell, vol. 73(1), pages 163-193, 01.
  7. Richard K. Green & Susan M. Wachter, 2005. "The American Mortgage in Historical and International Context," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 93-114, Fall.
  8. Friedman, Benjamin M, 1992. "Learning from the Reagan Deficits," American Economic Review, American Economic Association, vol. 82(2), pages 299-304, May.
  9. Becker, Robert A, 1980. "On the Long-Run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, MIT Press, vol. 95(2), pages 375-82, September.
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Citations

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Cited by:
  1. Enrique G. Mendoza & Emine Boz, 2009. "Financial Innovation, the Discovery of Risk, and the U.S. Credit Crisis," 2009 Meeting Papers 1273, Society for Economic Dynamics.
  2. Paolo Gelain & Kevin J. Lansing, 2013. "House prices, expectations, and time-varying fundamentals," Working Paper 2013/05, Norges Bank.
  3. Olga Gorbachev & Keshav Dogra, 2010. "Evolution of Consumption Volatility for the Liquidity Constrained Households over 1983 to 2004," Working Papers 10-12, University of Delaware, Department of Economics.
  4. Javier Andrés & José Emilio Boscá & Javier Ferri, 2011. "Household Debt and Labor Market Fluctuations," Working Papers 1102, International Economics Institute, University of Valencia.
  5. Alejandro Justiniano & Giorgio Primiceri & Andrea Tambalotti, 2013. "Household leveraging and deleveraging," Staff Reports 602, Federal Reserve Bank of New York.
  6. Meral Karasulu, 2008. "StressTesting Household Debt in Korea," IMF Working Papers 08/255, International Monetary Fund.
  7. Christopher Carroll & Jiri Slacalek & Martin Sommer, 2012. "Dissecting saving dynamics: measuring wealth, precautionary and credit effects," Working Paper Series 1474, European Central Bank.
  8. Caterina Mendicino, 2012. "Collateral Requirements: Macroeconomic Fluctuations and Macro-Prudential Policy," Working Papers w201211, Banco de Portugal, Economics and Research Department.
  9. Jeffrey R. Campbell & Zvi Hercowitz, 2011. "The financial labor supply accelerator," Working Paper Series WP-2011-05, Federal Reserve Bank of Chicago.
  10. Gareis, Johannes & Mayer, Eric, 2012. "Financial market heterogeneity: Implications for the EMU," W.E.P. - Würzburg Economic Papers 90, University of Würzburg, Chair for Monetary Policy and International Economics.
  11. Rubio, Margarita & Carrasco-Gallego, José A., 2012. "Macroprudential Measures, Housing Markets, and Monetary Policy," Dynare Working Papers 23, CEPREMAP.
  12. Jeffrey R. Campbell & Zvi Hercowitz, 2010. "Interest rates following financial re-regulation," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 2-13.

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