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Housing and debt over the life cycle and over the business cycle

  • Matteo Iacoviello
  • Marina Pavan

We study housing and debt in a quantitative general equilibrium model. In the cross-section, the model matches the wealth distribution, the age pro.les 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 .nd 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 financial 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 Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1032.

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Date of creation: 2011
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Handle: RePEc:fip:fedgif:1032
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