DP9671 Household Leveraging and Deleveraging

Author(s): Alejandro Justiniano, Giorgio E Primiceri, Andrea Tambalotti
Publication Date: October 2013
Keyword(s): Collateral constraints, Financial liberalization, House prices, Household debt
JEL(s): E20, E21
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9671

Abstract. U.S. households' debt skyrocketed between 2000 and 2007, and has been falling since. This leveraging (and deleveraging) cycle cannot be accounted for by the liberalization, and subsequent tightening, of credit standards in mortgage markets observed during the same period. We base this conclusion on a quantitative dynamic general equilibrium model calibrated using macroeconomic aggregates and microeconomic data from the Survey of Consumer Finances. From the perspective of the model, the credit cycle is more likely due to factors that impacted house prices more directly, thus affecting the availability of credit through a collateral channel. In either case, the macroeconomic consequences of leveraging and deleveraging are relatively minor, because the responses of borrowers and lenders roughly wash out in the aggregate.