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

See all articles by Dominik Menno

Dominik Menno

Aarhus University - School of Business and Social Sciences

Tommaso Oliviero

CSEF - University of Naples Federico II - Department of Economic and Statistical Sciences; CSEF; CefES; MoFiR

Date Written: February 19, 2016

Abstract

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

Menno, Dominik and Oliviero, Tommaso, Financial Intermediation, House Prices, and the Welfare Effects of the U.S. Great Recession (February 19, 2016). CSEF Working Paper No. 373, Available at SSRN: https://ssrn.com/abstract=2268987 or http://dx.doi.org/10.2139/ssrn.2268987

Dominik Menno (Contact Author)

Aarhus University - School of Business and Social Sciences ( email )

Nordre Ringgade 1
Aarhus C, DK-8000
Denmark

Tommaso Oliviero

CSEF - University of Naples Federico II - Department of Economic and Statistical Sciences ( email )

Via Cintia 26
Napoli
Italy

CSEF ( email )

Via Cintia
Complesso Monte S. Angelo
Napoli, Naples 80126
Italy

CefES ( email )

U6 Building
Viale Piero e Alberto Pirelli, 22
Milano, 20126
Italy

MoFiR ( email )

Piazzale Martelli, 8
Ancona, 60100
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
100
Abstract Views
1,261
rank
362,596
PlumX Metrics