The Role of Collateralized Household Debt in Macroeconomic Stabilization

35 Pages Posted: 14 Jun 2005 Last revised: 18 Dec 2022

See all articles by Jeffrey R. Campbell

Jeffrey R. Campbell

University of Notre Dame; Tilburg University

Zvi Hercowitz

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER)

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Date Written: May 2005

Abstract

Market innovations following the financial reforms of the early 1980s relaxed collateral constraints on household borrowing. The present paper examines the contribution of this development to the macroeconomic stabilization that occurred shortly thereafter. The model combines collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium setup. We use this tool to characterize the business cycle implications of lowering required down payments and rates of amortization for durable goods purchases as in the early 1980s. The model predicts that this relaxation of collateral constraints can explain a large fraction of the actual volatility decline in hours worked, output, household debt, and household durable goods purchases.

Suggested Citation

Campbell, Jeffrey R. and Hercowitz, Zvi, The Role of Collateralized Household Debt in Macroeconomic Stabilization (May 2005). NBER Working Paper No. w11330, Available at SSRN: https://ssrn.com/abstract=720416

Jeffrey R. Campbell (Contact Author)

University of Notre Dame ( email )

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Tilburg University ( email )

Tilburg, 5000 LE
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Zvi Hercowitz

Tel Aviv University - Eitan Berglas School of Economics ( email )

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