Credit Cycles with Market-Based Household Leverage

87 Pages Posted: 30 Jan 2019 Last revised: 1 Nov 2021

See all articles by William Diamond

William Diamond

University of Pennsylvania - Finance Department

Tim Landvoigt

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: October 29, 2021

Abstract

We develop a general equilibrium model in which households’ mortgage leverage is determined by supply and demand forces, where the price of credit impacts the quantity of leverage households choose. Mortgages are supplied by financial intermediaries, who offer households a menu of mortgage contracts whose pricing varies with intermediaries’ equity capital. In the model, growth in the demand for safe assets that replicates the falling interest rates in the 2000s causes an empirically realistic boom in household borrowing, debt-financed consumption, and house prices. This boom results in a larger bust in asset prices and household borrowing in future financial
crises.

Keywords: Credit Constraints, Household Leverage, Financial Intermediaries, Housing Boom, Credit Crises, Safe Assets

JEL Classification: E44, G21, E43

Suggested Citation

Diamond, William and Landvoigt, Tim, Credit Cycles with Market-Based Household Leverage (October 29, 2021). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper , Available at SSRN: https://ssrn.com/abstract=3318481 or http://dx.doi.org/10.2139/ssrn.3318481

William Diamond

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Tim Landvoigt (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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