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Working Paper
The financial labor supply accelerator
The financial labor supply accelerator links hours worked to minimum down payments for durable good purchases. When these constrain a household's debt, a persistent wage increase generates a liquidity shortage. This limits the income effect, so hours worked grow. The mechanism generates a positive comovement of labor supply and household debt, the strength of which depends positively on the minimum down-payment rate. Its potential macroeconomic importance comes from these labor supply fluctuations' procyclicality. This paper examines the comovement of hours worked and debt at the household ...
Conference Paper
The macroeconomic transition to high household debt
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 ...
Working Paper
Liquidity constraints of the middle class
There is evidence that a household's consumption response to transitory income does not decline, and perhaps increases, with the level of financial assets it holds. That is, middle class households with assets act as if they face liquidity constraints. This paper addresses this puzzling observation with a model of impatient households that face a large recurring expenditure. In spite of impatience, they save as this expenditure draws near. The authors call such saving made in preparation for a foreseeable event at a given future date "term saving." Term saving reverses the role of assets in ...
Discussion Paper
The allocation of goods and time over the business cycle
A Beckerian model of household production is developed to study the allocation of capital and time between market and home activities over the business cycle. The adopted framework treats the business and household sectors symmetrically. In the market, labor interacts with business capital to produce market goods and services, and likewise at home the remaining time, leisure, is combined with household capital to produce home goods and services. The theoretical model presented is parameterized, calibrated, and simulated to see whether it can rationalize the observed allocation of capital and ...
Working Paper
The role of households' collateralized debts in macroeconomic stabilization
Market innovations following the financial reforms of the early 1980's relaxed collateral constraints on households' borrowing. This paper examines the implications of this development for macroeconomic volatility. We combine collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium model, and we use this tool to characterize the business cycle implications of realistically lowering minimum down payments and rates of amortization for durable goods purchases. The model predicts that this relaxation of collateral constraints can explain a large ...
Journal Article
Interest rates following financial re-regulation
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.
Working Paper
Welfare implications of the transition to high household debt
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.
Discussion Paper
Macroeconomic implications of investment-specific technological change
A quantitative investigation of investment-specific technological change for the U.S. postwar period is undertaken, analyzing both long-term growth and business cycles within the same framework. The premise is that the introduction of new, more efficient capital goods is an important source of productivity change, and an attempt is made to disentangle its effects from the more traditional Hicks-neutral form of technological progress. The balanced growth path for the model is characterized and calibrated to U.S. National Income and Product Account data. The long- and short-run U.S. data are ...
Working Paper
The dynamics of work and debt
This paper characterizes the labor supply and borrowing of a household facing collateral requirements that limit its debt and compel it to accumulate equity in its durable goods stock. The household's discount rate exceeds the market rate of interest, so it would otherwise finance increased current consumption by borrowing against future wages. Collateral constraints generate a positive comovement between the household's debt, the stock of durable goods and labor supply following wage or interest rate shocks---as the household's labor supply adjusts to finance down payments on new durable ...