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Housing and Debt Over the Life Cycle and Over the Business Cycle

  • Matteo Iacoviello

    ()

    (Federal Reserve Board of Governors)

  • Marina Pavan

    (Universitat Jaume I)

We study housing and debt in a quantitative general equilibrium model. In the cross-section, the model matches the wealth distribution, the age profiles of homeownership and mortgage debt, and the frequency of housing adjustment. In the time-series, the model matches the procyclicality and volatility of housing investment, and the procyclicality of mortgage debt. We use the model to conduct two experiments. First, we investigate the consequences of higher individual income risk and lower downpayments, and find that these two changes can explain, in the model and in the data, the reduced volatility of housing investment, the reduced procyclicality of mortgage debt, and a small fraction of the reduced volatility of GDP. Second, we use the model to look at the behavior of housing investment and mortgage debt in an experiment that mimics the Great Recession: we find that countercyclical Önancial conditions can account for large drops in housing activity and mortgage debt when the economy is hit by large negative shocks.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 723.

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Date of creation: 02 Nov 2009
Date of revision: 19 Sep 2011
Handle: RePEc:boc:bocoec:723
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