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Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession

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  • Aaron Hedlund

    (University of Missouri)

  • Carlos Garriga

    (Federal Reserve Bank of St. Louis)

Abstract

This paper explores the contribution of housing and mortgage debt to the macroeconomic performance of the United States economy during the Great Recession, with a particular eye toward consumption. The importance of housing is evaluated using a quantitative, heterogeneous agent model with search frictions in the housing market and equilibrium mortgage default. The model successfully replicates key features of the U.S.\ economy prior to the Great Recession and can rationalize the dynamics of housing, debt, and consumption during the crisis. The increase in labor market risk and deterioration in housing finance both play pivotal but different roles in explaining the steep recession and slow recovery. Endogenous housing illiquidity is necessary to explain the magnitude of the house price drop, the spike in foreclosures, the fall in consumption, and the evolution of homeownership. The model also substantiates and explains findings from the literature on the sensitivity of consumption to house price movements and how the degree of household indebtedness affects this relationship. Lastly, the Federal Reserve's policy of Quantitative Easing is evaluated and found to have substantial effects on house price and consumption dynamics.

Suggested Citation

  • Aaron Hedlund & Carlos Garriga, 2016. "Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession," 2016 Meeting Papers 1564, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1564
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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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