TY - JOUR
T1 - Welfare implications of the transition to high household debt
AU - Campbell, Jeffrey R.
AU - Hercowitz, Zvi
N1 - Funding Information:
We are grateful to Erik Hurst, Richard Rogerson, and Tony Smith for their discussions of an earlier version of this paper and to audiences at the Federal Reserve Banks of San Francisco, Cleveland, and New York. We also thank the Pinhas Sapir Center at Tel Aviv University for financial support. Yaniv Ben-Ami provided expert research assistance. The views expressed herein are those of the authors, and they do not necessarily represent the views of the Federal Reserve Bank of Chicago, the Federal Reserve System, or its Board of Governors. A replication file is available on the JME website.
PY - 2009/1
Y1 - 2009/1
N2 - Aggressive deregulation of the mortgage market in the early 1980s triggered innovations that greatly reduced indebted households' required home equity, and a borrowing surge followed. This paper uses a calibrated general equilibrium model of lending from the wealthy to the middle class to evaluate the welfare effects of this reform quantitatively. We find that the "indirect" effects of endogenous interest rate and other relative price changes dominate the "direct" effect of relaxing the constraint. The borrowing household's welfare falls even though the reform directly relaxes a constraint on its trade. The saving household's welfare rises substantially.
AB - Aggressive deregulation of the mortgage market in the early 1980s triggered innovations that greatly reduced indebted households' required home equity, and a borrowing surge followed. This paper uses a calibrated general equilibrium model of lending from the wealthy to the middle class to evaluate the welfare effects of this reform quantitatively. We find that the "indirect" effects of endogenous interest rate and other relative price changes dominate the "direct" effect of relaxing the constraint. The borrowing household's welfare falls even though the reform directly relaxes a constraint on its trade. The saving household's welfare rises substantially.
KW - Financial deregulation
KW - Interest rates
KW - Mortgage debt
UR - http://www.scopus.com/inward/record.url?scp=59749084071&partnerID=8YFLogxK
U2 - 10.1016/j.jmoneco.2008.09.002
DO - 10.1016/j.jmoneco.2008.09.002
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AN - SCOPUS:59749084071
SN - 0304-3932
VL - 56
SP - 1
EP - 16
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
IS - 1
ER -