Public Debt and Crowding-out: The Role of Housing Wealth

40 Pages Posted: 21 May 2020

See all articles by Andrea Camilli

Andrea Camilli

University of Bath - Department of Economics

Marta Giagheddu

Johns Hopkins University SAIS

Date Written: May 20, 2020

Abstract

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

Camilli, Andrea and Giagheddu, Marta, Public Debt and Crowding-out: The Role of Housing Wealth (May 20, 2020). University of Milan Bicocca Department of Economics, Management and Statistics Working Paper No. 441, Available at SSRN: https://ssrn.com/abstract=3606673

Andrea Camilli (Contact Author)

University of Bath - Department of Economics ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

HOME PAGE: http://https://sites.google.com/site/andreacamillieconomics/

Marta Giagheddu

Johns Hopkins University SAIS ( email )

1717 Massachusetts Avenue NW
Washington DC, DC 20036
United States

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