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The role of households' collateralized debts in macroeconomic stabilization

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  • Jeffrey R. Campbell
  • Zvi Hercowitz

Abstract

Market innovations following the financial reforms of the early 1980's relaxed collateral constraints on households' borrowing. This paper examines the implications of this development for macroeconomic volatility. We combine collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium model, and we use this tool to characterize the business cycle implications of realistically lowering minimum down payments and rates of amortization for durable goods purchases. The model predicts that this relaxation of collateral constraints can explain a large fraction of the volatility decline in hours worked, output, household debt, and household durable goods purchases.

Suggested Citation

  • Jeffrey R. Campbell & Zvi Hercowitz, 2004. "The role of households' collateralized debts in macroeconomic stabilization," Working Paper Series WP-04-24, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-04-24
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    Cited by:

    1. Haavio, Markus & Mendicino, Caterina & Punzi, Maria Teresa, 2013. "Financial and economic downturns in OECD countries," Bank of Finland Research Discussion Papers 35/2013, Bank of Finland.
    2. Alessandro Calza & Tommaso Monacelli & Livio Stracca, 2013. "Housing Finance And Monetary Policy," Journal of the European Economic Association, European Economic Association, vol. 11, pages 101-122, January.
    3. Gareth Liu-Evans & Shalini Mitra, 2023. "Formal sector enforcement and welfare," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(3), pages 706-728, June.
    4. Jonas D. M. Fisher & Martin Gervais, 2007. "First-time home buyers and residential investment volatility," Working Paper Series WP-07-15, Federal Reserve Bank of Chicago.
    5. Calza, Alessandro & Monacelli, Tommaso & Stracca, Livio, 2006. "Mortgage markets, collateral constraints, and monetary policy: Do institutional factors matter?," CFS Working Paper Series 2007/10, Center for Financial Studies (CFS).
    6. Lambertini, Luisa & Mendicino, Caterina & Punzi, Maria Teresa, 2012. "Expectations-driven cycles in the housing market," Bank of Finland Research Discussion Papers 2/2012, Bank of Finland.
    7. Frank Smets, 2007. "Housing is the business cycle: commentary," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 235-243.
    8. Benoit Mojon, 2007. "Monetary policy, output composition and the Great Moderation," Working Paper Series WP-07-07, Federal Reserve Bank of Chicago.

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    Keywords

    Households - Economic aspects; Macroeconomics; Labor supply;
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