Financial Intermediation, House Prices, and the Welfare Effects of the U.S. Great Recession
CSEF Working Paper No. 373
52 Pages Posted: 25 May 2013 Last revised: 1 Mar 2016
Date Written: February 19, 2016
This paper quantifies how the welfare costs of the U.S. Great Recession are distributed across borrowing and saving U.S. households. For this purpose, we use a calibrated dynamic general equilibrium model of housing and household debt with shocks to aggregate income and shocks to the financial intermediation sector. The model matches the boom-bust cycle in house prices, the dynamics of household mortgage debt, and the increase in wealth inequality observed in the U.S. between 2001-2013. We find larger welfare costs of the Great Recession for borrowers than for savers. Borrowers experience a larger drop in consumption than savers who relatively benefit from a redistribution of housing wealth during the recession. We show that the size of this redistribution mechanism would have been significantly lower if (i) mortgage spreads would have remained at the low pre-crisis levels during the recession or if (ii) aggregate leverage would have remained at pre-2001 levels.
Keywords: Housing Wealth, Heterogeneous Agents, Welfare, Leverage
JEL Classification: D31, D58, D90, E21, E30, E44
Suggested Citation: Suggested Citation