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Financial Frictions, Asset Prices, and the Great Recession

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Abstract

We study financial shocks to households’ ability to borrow in an economy that quantitatively replicates U.S. earnings, financial, and housing wealth distributions and the main macro aggregates. Such shocks generate large recessions via the negative wealth effect associated with the large drop in house prices triggered by the reduced access to credit of a large number of households. The model incorporates additional margins that are crucial for a large recession to occur: that it is difficult to reallocate production from consumption to investment or net exports, and that the reductions in consumption contribute to reductions in measured TFP.

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  • Huo, Zhen, 2016. "Financial Frictions, Asset Prices, and the Great Recession," CEPR Discussion Papers 11544, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:11544
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    Cited by:

    1. Atif Mian & Amir Sufi, 2018. "Finance and Business Cycles: The Credit-Driven Household Demand Channel," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 31-58, Summer.
    2. Greg Kaplan & Kurt Mitman & Giovanni L. Violante, 2020. "The Housing Boom and Bust: Model Meets Evidence," Journal of Political Economy, University of Chicago Press, vol. 128(9), pages 3285-3345.
    3. Pierre Mabille, 2019. "Aggregate Precautionary Savings Motives," 2019 Meeting Papers 344, Society for Economic Dynamics.
    4. Emil Verner & Győző Gyöngyösi, 2020. "Household Debt Revaluation and the Real Economy: Evidence from a Foreign Currency Debt Crisis," American Economic Review, American Economic Association, vol. 110(9), pages 2667-2702, September.
    5. Alonso, Cristian, 2018. "Hard vs. soft financial constraints: Implications for the effects of a credit crunch," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 198-223.
    6. Yavuz Arslan & Bulent Guler & Burhan Kuruscu, 2020. "Credit Supply Driven Boom-Bust Cycles," Working Papers tecipa-664, University of Toronto, Department of Economics.
    7. Alessandro Gavazza & Andrea Lanteri, 2021. "Credit Shocks and Equilibrium Dynamics in Consumer Durable Goods Markets [“Balladurette and Juppette: A Discrete Analysis of Scrapping Subsidies”]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(6), pages 2935-2969.
    8. Carlos Garriga & Aaron Hedlund, 2020. "Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession," American Economic Review, American Economic Association, vol. 110(6), pages 1603-1634, June.
    9. 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).
    10. Nuno Paixao, 2019. "Propagation of House Price Shocks through the Banking System," 2019 Meeting Papers 1237, Society for Economic Dynamics.
    11. Mian, A. & Sufi, A., 2016. "Who Bears the Cost of Recessions? The Role of House Prices and Household Debt," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 255-296, Elsevier.
    12. Nuno Paixao, 2018. "Housing Prices and Consumer Spending: The Bank Balance Sheet Channel," 2018 Meeting Papers 1017, Society for Economic Dynamics.
    13. Yunho Cho & James Morley & Aarti Singh, 2024. "Did marginal propensities to consume change with the housing boom and bust?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(1), pages 174-199, January.

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    More about this item

    Keywords

    Balance sheet recession; Asset price; Goods market frictions; Labor market frictions;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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