The Role of Collateralized Household Debt in Macroeconomic Stabilization

Abstract:     
Market innovations following the financial reforms of the early 1980's relaxed collateral constraints on households' borrowing. This paper examines the implications of this development for macroeconomic volatility. We combine collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium model, and we use this tool to characterize the business cycle implications of realistically lowering minimum down payments and rates of amortization for durable goods purchases. The model predicts that this relaxation of collateral constraints can explain a large fraction of the volatility decline in hours worked, output, household debt, and household durable goods purchases.

Number of Pages in PDF File: 42

Keywords: Labor Supply, Mortgage Debt, Consumer Credit, Real Business Cycles

JEL Classification: E13, E32

working papers series