Financial Intermediation, House Prices and the Welfare Effects of the U.S. Great Recession

Dominik Menno and Tommaso Oliviero ()

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: This paper quantifies how the welfare costs of the U.S. Great Recession are distributed across borrowing and saving U.S. households. For this purpose, we use a calibrated dynamic general equilibrium model of housing and household debt with shocks to aggregate income and shocks to the financial intermediation sector. The model matches the boom-bust cycle in house prices, the dynamics of household mortgage debt, and the increase in wealth inequality observed in the U.S. between 2001-2013. We find larger welfare costs of the Great Recession for borrowers than for savers. Borrowers experience a larger drop in consumption than savers who relatively benefit from a redistribution of housing wealth during the recession. We show that the size of this redistribution mechanism would have been significantly lower if (i) mortgage spreads would have remained at the low pre-crisis levels during the recession or if (ii) aggregate leverage would have remained at pre-2001 levels.

Keywords: Housing Wealth; Heterogeneous Agents; Welfare; Leverage (search for similar items in EconPapers)
JEL-codes: D31 D58 D90 E21 E30 E44 (search for similar items in EconPapers)
Date: 2014-08-28, Revised 2016-10-04
New Economics Papers: this item is included in nep-ban, nep-dge, nep-mac and nep-ure
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Financial intermediation, house prices, and the welfare effects of the U.S. Great Recession (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:373

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