Did the Housing Bust Cause the Great Recession?
Gianluca Violante and
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Gianluca Violante: New York University
Greg Kaplan: Princeton University
No 1300, 2013 Meeting Papers from Society for Economic Dynamics
The Great Recession of 2007-09 was preceded by sustained period of house price growth that ended in a large aggregate decline of house prices. Our paper evaluates quantitatively the extent to which changes in house prices can explain the drop in consumption witnessed during the Great Recession. In particular, we are interested in understanding how changes in house prices affect mortgage leverage decisions by households and how these changes in household balance sheets translate into consumption responses. If households increase mortgage debt in response to house price increases and use the extracted funds to finance contemporaneous consumption, then a large drop in house prices could lead to household deleveraging and a large contraction in consumption.
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:1300
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