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 …nd that countercyclical …nancial conditions can account for large drops in housing activity and mortgage debt when the economy is hit by large negative shocks.
This paper estimates a dynamic model of durable and non-durable consumption choice and default behavior in an economy where risky borrowing is allowed and bankruptcy protection is regulated by law. I exploit the substantial difference in the generosity of bankruptcy exemptions across the U.S. states to assess the role of durable goods as both informal collateral for unsecured debt and self-insurance against bad shocks to earnings. The model accounts for the equilibrium effects of bankruptcy protection on both consumer saving behavior and the credit market. In addition to providing reasonable estimates of the discount rate and risk aversion, I find that the generosity of bankruptcy protection does change both the incentives and the ability of households to accumulate durable wealth. The more generous the bankruptcy regulation, the lower the net durable wealth held by households in the first half of the life cycle before retirement. In order to minimize the default rate bankruptcy protection should be removed. The optimal level of exemption is positive but low.
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 …nd that countercyclical …nancial conditions can account for large drops in housing activity and mortgage debt when the economy is hit by large negative shocks.
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 …nd that countercyclical …nancial 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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