Housing and Debt Over the Life Cycle and Over the Business Cycle

57 Pages Posted: 7 Dec 2011

See all articles by Matteo M. Iacoviello

Matteo M. Iacoviello

Federal Reserve Board - Trade and Financial Studies

Marina Pavan

Jaume I University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 23, 2011

Abstract

We study housing and debt in a quantitative general equilibrium model. In the cross-section, the model matches the wealth distribution, the age profiles of homeownership and mortgage debt, and the frequency of housing adjustment. In the time-series, the model matches the procyclicality and volatility of housing investment, and the procyclicality of mortgage debt. We use the model to conduct two experiments. First, we investigate the consequences of higher individual income risk and lower downpayments, and find that these two changes can explain, in the model and in the data, the reduced volatility of housing investment, the reduced procyclicality of mortgage debt, and a small fraction of the reduced volatility of GDP. Second, we use the model to look at the behavior of housing investment and mortgage debt in an experiment that mimics the Great Recession: we find that countercyclical financial conditions can account for large drops in housing activity and mortgage debt when the economy is hit by large negative shocks.

Keywords: Housing, Housing Investment, Mortgage Debt, Life-cycle Models, Income Risk, Homeownership, Precautionary Savings, Borrowing Constraints

JEL Classification: E22, E32, E44, E51, D92, R21

Suggested Citation

Iacoviello, Matteo M. and Pavan, Marina, Housing and Debt Over the Life Cycle and Over the Business Cycle (October 23, 2011). FRB International Finance Discussion Paper No. 1032. Available at SSRN: https://ssrn.com/abstract=1966978 or http://dx.doi.org/10.2139/ssrn.1966978

Matteo M. Iacoviello (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

Marina Pavan

Jaume I University - Department of Economics ( email )

Campus del Riu Sec.
E-12071 Castellon
Spain

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