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Welfare Implications of the Transition to High Household Debt

40 Pages Posted: 22 Dec 2006  

Jeffrey R. Campbell

Federal Reserve Bank of Chicago; CentER, Tilburg University

Zvi Hercowitz

Tel Aviv University - Eitan Berglas School of Economics; National Bureau of Economic Research (NBER)

Date Written: November 2006

Abstract

Aggressive deregulation of the mortgage market in the early 1980s triggered innovations that greatly reduced the required home equity of U.S. households. This allowed households to cash-out a large part of accumulated equity, which equaled 71 percent of GDP in 1982. A borrowing surge followed: Household debt increased from 43 to 62 percent of GDP in the 1982-2000 period. What are the welfare implications of such a reform for borrowers and savers? This paper uses a calibrated general equilibrium model of lending from the wealthy to the middle class to evaluate these effects quantitatively.

Keywords: Financial Reform, Mortgage Debt, Interest Rates

JEL Classification: E44, E65

Suggested Citation

Campbell, Jeffrey R. and Hercowitz, Zvi, Welfare Implications of the Transition to High Household Debt (November 2006). FRB of Chicago Working Paper No. 2006-27. Available at SSRN: https://ssrn.com/abstract=953219 or http://dx.doi.org/10.2139/ssrn.953219

Jeffrey R. Campbell (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
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312-322-2357 (Fax)

HOME PAGE: http://www.jyrc.org

CentER, Tilburg University ( email )

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Tilburg, 5000 LE
Netherlands

Zvi Hercowitz

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 640 9916 (Phone)
+972 3 640 9908 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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