Financial Intermediation, House Prices, and the Distributive Effects of the U.S. Great Recession

This paper quantifies the effects of credit spread and income shocks on aggregate house prices and households’ welfare. We address this issue within a stochastic dynamic general equilibrium model with heterogeneous households and occasionally binding collateral constraints. Credit spread shocks arise as innovations to the financial intermediation technology of stylized banks. We calibrate the model to the U.S. economy and simulate the Great Recession as a contemporaneous negative shock to financial intermediation and aggregate income. We find that (i) in the Great recession constrained agents (borrowers) lose more than unconstrained agents (savers) from the aggregate house prices drop; (ii) credit spread shocks have, by their nature, re-distributive effects and - when coupled with a negative income shock as in the Great Recession - give rise to larger (smaller) welfare losses for borrowers (savers); (iii) imposing an always binding collateral constraint, the non-linearity coming from the combination of the two shocks vanishes, and the re-distributive effects between agents’ types are smaller.