Welfare implications of the transition to high household debt
AbstractAggressive 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 InfoArticle provided by Elsevier in its journal Journal of Monetary Economics.
Volume (Year): 56 (2009)
Issue (Month): 1 (January)
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Web page: http://www.elsevier.com/locate/inca/505566
Financial deregulation Mortgage debt Interest rates;
Other versions of this item:
- Jeffrey R. Campbell & Zvi Hercowitz, 2006. "Welfare implications of the transition to high household debt," Working Paper Series, Federal Reserve Bank of Chicago WP-06-27, Federal Reserve Bank of Chicago.
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