A Quantitative Model of "Too Big to Fail,"' House Prices, and the Financial Crisis

Omer Acikgoz and James Kahn ()

MPRA Paper from University Library of Munich, Germany

Abstract: This paper develops a quantitative model that can rationally explain a sizeable part of the dramatic rise and fall of house prices in the 2000-2009 period. The model is driven by the assumption that the government cannot resist bailing out large financial institutions, but can mitigate the consequences by limiting financial institutions' risk-taking. An episode of regulatory forbearance, modeled as a relaxation of loan-to-value limits for conforming mortgages, is welfare-reducing, results in opportunistic behavior and, for plausible parameters inflates house prices and price/rent ratios by roughly twenty percent. This "boom" is followed by a collapse with high default rates.

Keywords: Too-Big-to-Fail; Financial Crisis; House Prices (search for similar items in EconPapers)
JEL-codes: E02 E21 E3 G21 R31 (search for similar items in EconPapers)
Date: 2016-06-06
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac, nep-rmg and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/71831/1/MPRA_paper_71831.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/76385/1/MPRA_paper_76385.pdf revised version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:71831

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().