Conference Paper

Financial innovation and the Great Moderation: what do household data say?

Abstract: Aggressive deregulation of the household debt market in the early 1980s triggered innovations that greatly reduced the required home equity of U.S. households, allowing them to cash-out a large part of accumulated equity. In 1982, home equity equaled 71 percent of GDP; so this generated a borrowing shock of huge macroeconomic proportions. The combination of increasing household debt from 43 to 56 percent of GDP with high interest rates during the 1982-1990 period is consistent with such a shock to households? demand for funds. This paper uses a quantitative general equilibrium model of lending from the wealthy to the middle class to evaluate the positive and normative aspects of the transition to a high debt economy. Using the model, we interpret evidence on the changing distribution of assets and debt as well as macro time series since 1982.

Keywords: Households - Economic aspects;

Status: Published in Financial innovations and the real economy : a conference (2006, November 16-17)

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Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Proceedings

Publication Date: 2006

Issue: Nov