EconPapers    
Economics at your fingertips  
 

Housing Prices and Consumer Spending: The Bank Balance Sheet Channel

Nuno Paixao
Additional contact information
Nuno Paixao: Bank of Canada

No 1017, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: I quantify the extent to which deterioration of bank balance sheets explains the large contraction in housing prices and consumption experienced by the U.S. during the last recession. I introduce a Banking Sector with balance sheet frictions into a model of long-term collateralized debt with risk of default. Credit supply is endogenously determined and depends on the capitalization of the entire banking sector. Mortgage spreads and endogenous down payments increase in periods when banks are poorly capitalized. I simulate an increase in the stock of housing and a negative income shock to match the decline in house prices between 2006-2009. The model generates changes in consumption, foreclosures and refinance rates similar to those observed in the U.S. between 2006 and 2009. Changes in financial intermediaries’ cost of funding explain, respectively, 38, 22 and 29 percent of the changes in housing prices, foreclosures and consumption generated by the model. These results show that the endogenous response of banks’ credit supply can partially explain how changes in housing prices affect consumption decisions. I use this framework to analyze the impact of debt forgiveness and banks’ recapitalization to mitigate the drop in housing prices and consumption. I also present empirical evidence that balance sheet mechanism implied by the model was operational during this period. In other words, I show that during the great recession, changes in the real estate prices impacted the balance sheet of the banks that reacted by contracting their mortgage credit supply.

New Economics Papers: this item is included in nep-acc, nep-ban, nep-dge and nep-ure
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://economicdynamics.org/meetpapers/2018/paper_1017.pdf (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:red:sed018:1017

Access Statistics for this paper

More papers in 2018 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

 
Page updated 2019-05-10
Handle: RePEc:red:sed018:1017