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Collateral Constraints and Macroeconomic Asymmetries

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  • Luca Guerrieri

    (Federal Reserve Board)

  • Matteo Iacoviello

    (Federal Reserve Board)

Abstract

We show that a simple macroeconomic model with collateral constraints displays strong asymmetric responses to boom and bust periods. In a boom triggered by a rise in asset values, constraints become more and more relaxed, the collateral channel is weaker, and the response of aggregate consumption (and output) to a wealth shock is positive but small. In a recession, collateral constraints get tighter and tighter, the collateral channel gets stronger, and the response in consumption from a given change in asset values is negative and large. In experiments from an estimated model, we show how the elasticity of consumption to housing wealth can become nearly three times as large in a recession, even without accounting for the zero bound on interest rates. One implication from our model is that wealth effects computed in normal times might underestimate the true wealth effects which incorporate the response to large, negative wealth shocks such as those occurred during the Great Recession.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1024.

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Date of creation: 2012
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Handle: RePEc:red:sed012:1024

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  1. Chadi S. Abdallah & William D. Lastrapes, 2012. "Home Equity Lending and Retail Spending: Evidence from a Natural Experiment in Texas," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(4), pages 94-125, October.
  2. Manuel Adelino & Antoinette Schoar & Felipe Severino, 2013. "House Prices, Collateral and Self-Employment," NBER Working Papers 18868, National Bureau of Economic Research, Inc.
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Cited by:
  1. Thorsten Beck & Andrea Colciago & Damjan Pfajfar, 2014. "The role of financial intermediaries in monetary policy transmission," DNB Working Papers 420, Netherlands Central Bank, Research Department.
  2. Dominik Menno & Tommaso Oliviero, 2013. "Financial Intermediation, House Prices, and the Distributive Effects of the U.S. Great Recession," Economics Working Papers ECO2013/05, European University Institute.

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