Household Debt, Financial Intermediation, and Monetary Policy

Yahong Zhang

No 1504, Working Papers from University of Windsor, Department of Economics

Abstract: The collapse of the housing prices in the U.S. during the Great Recession not only eroded housing wealth held by households, but also the values of the assets in the banking sector. As a result, during the Great Recession mortgage risk premium increases signi?cantly. I introduce a micro-founded banking sector to a standard DSGE model with household debt to study the interaction between housing prices, household debt and banks’ balance sheet positions. I estimate the model using the US data from 1991Q1 to 2014Q1. I ?nd that the model accounts well the negative relationship between housing prices and mortgage risk premium. In the model, a weakened households’ demand for housing leads to a decline in housing prices, which worsens the banks’ balance sheet positions, and as a result, risk premium rises. The results show that housing demand shocks as well as shocks that increases the riskiness of the banking sector contribute signi?cantly to the decline in output during the Great Recession. I also ?nd that the unconventional monetary policy implemented by the Federal Reserve mitigates the decline in output.

Keywords: household debt; risk premium; banking; unconventional monetary policy (search for similar items in EconPapers)
JEL-codes: E32 E44 E52 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2015-11
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Household debt, financial intermediation, and monetary policy (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:wis:wpaper:1504

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