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The Role of Collateralized Household Debt in Macroeconomic Stabilization

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  • Jeffrey R. Campbell
  • Zvi Hercowitz

Abstract

Market innovations following the financial reforms of the early 1980s relaxed collateral constraints on household borrowing. The present paper examines the contribution of this development to the macroeconomic stabilization that occurred shortly thereafter. The model combines collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium setup. We use this tool to characterize the business cycle implications of lowering required down payments and rates of amortization for durable goods purchases as in the early 1980s. The model predicts that this relaxation of collateral constraints can explain a large fraction of the actual volatility decline in hours worked, output, household debt, and household durable goods purchases.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11330.

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Date of creation: May 2005
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Handle: RePEc:nbr:nberwo:11330

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  15. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, American Economic Association, vol. 95(3), pages 739-764, June.
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