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Shocks, Frictions, and Inequality in US Business Cycles

Christian Bayer and Ralph Luetticke
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Christian Bayer: Universitaet Bonn
Ralph Luetticke: University College London

No 256, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: The liquidity of the US housing market undergoes large swings that lead the business cycle. After an increase in the time to sell a house, output falls while households increase their liquid asset holdings and simultaneously lower residential investment. A model of incomplete markets and nominal rigidities can rationalize the observed behavior. When houses become less liquid assets, households maintain the capacity for consumption smoothing by demanding a larger portfolio share of liquid (paper) assets instead of houses. This leads to a demand-driven recession. The recessionary effects get stronger if the banking sector produces liquid assets from mortgaging houses.

Date: 2019
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