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Regressive Welfare Effects of Housing Bubbles

Andrew Graczyk and Toan Phan ()
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Andrew Graczyk: Wake Forest University

No 18-10, Working Paper from Federal Reserve Bank of Richmond

Abstract: We analyze the welfare effects of asset bubbles in a model with income inequality and financial friction. We show that a bubble that emerges in the value of housing, a durable asset that is fundamentally useful for everyone, has regressive welfare effects. By raising the housing price, the bubble benefits high-income savers but negatively affects low-income borrowers. The key intuition is that, by creating a bubble in the market price, savers' demand for the housing asset for investment purposes imposes a negative externality on borrowers, who only demand the housing asset for utility purposes. The model also implies a feedback loop: high income inequality depresses the interest rates, facilitating the existence of housing bubbles, which in turn have regressive welfare effects.

Keywords: rational bubble; inequality; housing; financial friction (search for similar items in EconPapers)
JEL-codes: E10 E21 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-ure
Date: 2018-04-18
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