Public Debt and Crowding-out: The Role of Housing Wealth
41 Pages Posted: 21 May 2020 Last revised: 23 Oct 2020
Date Written: May 20, 2020
We investigate the link between housing wealth concentration and the macroeconomic effects of a rise in domestic banks’ exposure to sovereign securities. We build a general equilibrium model with housing and heterogeneous agents who differ in their investment opportunities. Banks, optimizing their portfolio between mortgages and sovereign securities, are characterized by financial frictions as households’ collateralized debt links government debt with the real economy, through interest rates and housing prices. A country willing to lower the financing cost of the domestic debt in a time of dry out of financial markets has in moral suasion a viable option. We find a trade-off between real estate wealth concentration, household lending, and consumption inequality. However, under binding financial regulation, moral suasion can help reducing wealth inequality while persistently rising consumption inequality. This comes at the cost of generating worse losses for savers and banks while failing to reduce financing costs of government.
Keywords: Sovereign risk, housing, lending crowding-out, regulation, liquidity, heterogeneity
JEL Classification: E32, E44, G11, G18, R21
Suggested Citation: Suggested Citation