I do not have any conflict of interest or financial relationship that would bear on the research in this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

We thank Bob Hall and John Leahy for their useful discussions and for numerous exchanges. For helpful comments, we are grateful to Andy Atkeson, Chris Carroll, V. ABSTRACTWe study the effects of a credit crunch on consumer spending in a heterogeneous-agent incomplete-market model. After an unexpected permanent tightening in consumers' borrowing capacity, some consumers are forced to deleverage and others increase their precautionary savings. This depresses interest rates, especially in the short run, and generates an output drop, even with flexible prices. The output drop is larger with nominal rigidities, if the zero lower bound prevents the interest rate from adjusting downwards. Adding durable goods to the model, households take larger debt positions and the output response may be larger.

This paper constructs a model of non-balanced economic growth. The

We extend the concept of competitive search equilibrium to environments with private information, and in particular adverse selection. Principals (e.g. employers or agents who want to buy assets) post contracts, which we model as revelation mechanisms. Agents (e.g. workers, or asset holders) have private information about the potential gains from trade. Agents observe the posted contracts and decide where to apply, trading off the contracts' terms of trade against the probability of matching, which depends in general on the principals' capacity constraints and market search frictions. We characterize equilibrium as the solution to a constrained optimization problem, and prove that principals offer separating contracts to attract different types of agents. We then present a series of applications, including models of signaling, insurance, and lemons. These illustrate the usefulness and generality of the approach, and serve to contrast our findings with standard results in both the contract and search literatures.

Recent empirical work shows large consumption responses to house price movements. This is at odds with a prominent theoretical view which, using the logic of the permanent income hypothesis, argues that consumption responses should be small. We show that, in contrast to this view, workhorse models of consumption with incomplete markets calibrated to rich crosssectional micro facts actually predict large consumption responses, in line with the data. To explain this result, we show that consumption responses to permanent house price shocks can be approximated by a simple and robust rule-of-thumb formula: the marginal propensity to consume out of temporary income times the value of housing. In our model, consumption responses depend on a number of factors such as the level and distribution of debt, the size and history of house price shocks, and the level of credit supply. Each of these effects is naturally explained with our simple formula.

In this paper, we explore differential changes in house prices across neighborhoods within a city to better understand the nature of house price dynamics across cities. Using a variety of different data sources, we show that, during city-level house price booms, neighborhoods with lower initial prices experience larger price growth. This occurs in spite of the fact that the supply of housing is more elastic in these neighborhoods. In particular, we show that low price neighborhoods that directly abut high price neighborhoods appreciate (depreciate) the most during city-wide housing price booms (busts). To explain these facts, we then present a spatial equilibrium model of a city with rich and poor agents. The key ingredient of our model is a positive neighborhood externality: agents like to live in areas where more rich agents live. Also, rich agents are the ones who benefit the most from this externality. In equilibrium there is full segregation: the rich are concentrated in the city center and the poor live in the periphery of the city. In response to a demand shock (e.g. a decrease in the interest rate, an increase in city-wide income), rich households expand into adjacent poor neighborhoods. This is what we term "endogenous gentrification". As the rich move into a poor neighborhood, the land value increases due to the externality, driving house prices up. In addition, the model predicts that the city-wide responsiveness of house prices to a given demand shock will depend on the income distribution of the city. Richer cities respond more to the shock, even if housing supply is perfectly elastic, because they experience a higher degree of gentrification. We also show that the data are consistent with many additional predictions of our model. In particular, we find that the neighborhoods that experience the highest price increases show strong evidence of gentrification, and that the initial level of income and changes in income explain cross city differences in house price appreciation rates.

I do not have any conflict of interest or financial relationship that would bear on the research in this paper. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

This paper constructs a model of non-balanced economic growth. The