Household Debt and Foreign Capital Flows

Giorgio Primiceri, Andrea Tambalotti and Alejandro Justiniano

No 964, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: We analyze the macroeconomic effects of variations in household leverage in an open economy using a quantitative general equilibrium model. The framework features debt by borrowers limited to a fraction of the market value of their real estate holdings, which serve as collateral. Domestic and foreign savers supply funds through a domestic intermediation sector. The main objective of the study is to characterize the interaction between changes in the supply of foreign capital (the international savings glut) and the credit and housing boom and bust in the United States. We do so within a tractable, quantitative macroeconomic model with rich transmission mechanisms and a realistic structure of mortgage contracts. This framework allows us to quantify the extent to which the flow of funds from abroad might have represented an engine, and/or an amplification mechanism, of the leverage cycle experienced by the US economy in the last decade. We rely on data from the Survey of Consumer Finances, NIPA and TICS to calibrate parameters and to inform our experiments.

Date: 2013
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