Failure to Launch: Housing, Debt Overhang, and the Inflation Option

Aaron Hedlund

American Economic Journal: Macroeconomics, 2019, vol. 11, issue 2, 228-74

Abstract: Can inflating away nominal mortgage liabilities effectively combat recessions? I address this question using a model of illiquid housing, endogenous credit supply, and equilibrium default. I show that, in an ordinary recession, temporarily raising the inflation target has only modest or even counterproductive effects. However, during episodes like the Great Recession, inflation effectively boosts house prices, consumption, and dramatically cuts foreclosures, but only when fixed-rate mortgages are the dominant instrument. The quantitative implications of inflation also vary if other nominal rigidities or demand externalities are present. In the cross section, inflation delivers especially large gains to highly leveraged homeowners.

JEL-codes: D14 E31 E32 E52 G21 R31 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/mac.20160371
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Citations: View citations in EconPapers (4)

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