The Role of Collateralized Household Debt in Macroeconomic Stabilization

Working Paper No. 11330 Market innovations following the financial reforms of the early 1980s relaxed collateral constraints on household borrowing. The present paper examines the contribution of this development to the macroeconomic stabilization that occurred shortly thereafter. The model combines...

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Bibliographic Details
Published in:NBER Working Paper Series 2005-05, p.11330
Main Authors: Campbell, Jeffrey R, Hercowitz, Zvi
Format: Article
Language:English
Subjects:
Aggregates
Borrowing
Capital markets
Central banks
Collateral
Down payments
Durable goods
Economic theory
Equilibrium
Households
Interest rates
Labor supply
Loans
Macroeconomics
Mortgages
Technological change
Volatility
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Summary:Working Paper No. 11330 Market innovations following the financial reforms of the early 1980s relaxed collateral constraints on household borrowing. The present paper examines the contribution of this development to the macroeconomic stabilization that occurred shortly thereafter. The model combines collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium setup. We use this tool to characterize the business cycle implications of lowering required down payments and rates of amortization for durable goods purchases as in the early 1980s. The model predicts that this relaxation of collateral constraints can explain a large fraction of the actual volatility decline in hours worked, output, household debt, and household durable goods purchases.
ISSN:0898-2937
DOI:10.3386/w11330