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Federal Reserve Bank of Chicago
Economic Perspectives
Interest rates following financial re-regulation
Jeffrey R. Campbell
Zvi Hercowitz
Abstract

This article uses a calibrated general-equilibrium model of lending from the wealthy to the middle class to evaluate the effects of tightening household lending standards. The authors simulate a rise in down payment and amortization rates from their average values in the late 1990s and early 2000s to levels more typical of the era before the financial deregulation of the early 1980s. Their results show a drop in loan demand. This substantially lowers interest rates for an extended period. Counterintuitively, tightening lending standards makes borrowers better off.


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Jeffrey R. Campbell & Zvi Hercowitz, "Interest rates following financial re-regulation" , Federal Reserve Bank of Chicago, Economic Perspectives, issue Q I, pages 2-13, 2010.
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Keywords: Interest rates ; Housing - Finance
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