 Household debt, financial intermediation, and monetary policyJournal of Macroeconomics, 2019, vol. 59, issue C, 230-257 Abstract: The collapse of housing prices in the U.S. during the Great Recession eroded not only consumers’ housing wealth but also the assets held by the banking sector. I introduce a micro-founded banking sector to a standard DSGE model with household debt to study the interaction between housing prices, household debt, and banks’ balance sheet positions. I estimate the model using US data from 1991Q1 to 2014Q1 and find that there is a significant spillover effect from the housing market to the rest of the aggregate economy. The spillover effect is mainly evident on investment through the banking sector. A negative shock to housing demand or to the perceived riskiness of assets backed by housing wealth decreases the banks’ net worth. As a result, both mortgage and corporate spreads rise, leading to a decline in aggregate investment. I also find that an unconventional monetary policy is more effective in dampening the downturn when it targets the assets backed by housing wealth. Keywords: Household debt; Mortgage spread; Banking; Unconventional monetary policy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:59:y:2019:i:c:p:230-257 DOI: 10.1016/j.jmacro.2018.12.001 Access Statistics for this article Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos More articles in Journal of Macroeconomics from Elsevier |
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