Public Debt and Crowding-out: The Role of Housing Wealth
40 Pages Posted: 21 May 2020
Date Written: May 20, 2020
We investigate the role of housing wealth concentration for the transmission of macroeconomic shocks in high-debt economies. We build a general equilibrium model with housing and heterogeneous agents who differ in their savings and investment opportunities. Banks optimizing their portfolio between mortgages and sovereign securities are characterized by financial frictions operating as a transmission mechanism, as households’ collateralized debt links sovereign debt with the real economy, through interest rates and housing prices. We find that the more concentrated wealth is the worse the recession is, however associated with less consumption inequality due to a smaller crowding out of households’ lending. We also show that a similar positive effect across agents can be obtained at different levels of inequality through financial repression and that a relevant distributional trade-off between macroprudential policy and household collateral requirements is present.
Keywords: Sovereign risk, housing, lending crowding-out, regulation, liquidity, heterogeneity
JEL Classification: E32, E44, G11, G18, R21
Suggested Citation: Suggested Citation