Welfare implications of the transition to high household debt

Jeffrey R. Campbell, Zvi Hercowitz*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


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.

Original languageEnglish
Pages (from-to)1-16
Number of pages16
JournalJournal of Monetary Economics
Issue number1
StatePublished - Jan 2009


  • Financial deregulation
  • Interest rates
  • Mortgage debt


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