Working Paper: NBER ID: w11330
Authors: Jeffrey R. Campbell; Zvi Hercowitz
Abstract: Market innovations following the financial reforms of the early 1980s relaxed collateral constraints on household borrowing. The present paper examines the contribution of this development to the macroeconomic stabilization that occurred shortly thereafter. The model combines collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium setup. We use this tool to characterize the business cycle implications of lowering required down payments and rates of amortization for durable goods purchases as in the early 1980s. The model predicts that this relaxation of collateral constraints can explain a large fraction of the actual volatility decline in hours worked, output, household debt, and household durable goods purchases.
Keywords: Collateralized Debt; Macroeconomic Volatility; Financial Reforms; Household Borrowing; Labor Supply
JEL Codes: E3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Relaxation of collateral constraints on household borrowing (G51) | Stabilization of the macroeconomy (E63) |
| Relaxation of collateral constraints on household borrowing (G51) | Decline in volatility of hours worked (J29) |
| Relaxation of collateral constraints on household borrowing (G51) | Decline in volatility of output (E32) |
| Relaxation of collateral constraints on household borrowing (G51) | Decline in volatility of household debt (G59) |
| Relaxation of collateral constraints on household borrowing (G51) | Decline in volatility of durable goods purchases (E32) |
| Lowering collateral requirements (G21) | Weakened link between durable goods purchases and labor supply (J29) |
| Relaxation of collateral constraints (G33) | Stabilization of hours worked (J29) |
| Lowering down payment requirements and rates of amortization (G21) | Reduced aggregate variability in economic indicators (C43) |