Working Paper: NBER ID: w23694
Authors: Greg Kaplan; Kurt Mitman; Giovanni L. Violante
Abstract: We build a model of the U.S. economy with multiple aggregate shocks (income, housing finance conditions, and beliefs about future housing demand) that generate fluctuations in equilibrium house prices. Through a series of counterfactual experiments, we study the housing boom and bust around the Great Recession and obtain three main results. First, we find that the main driver of movements in house prices and rents was a shift in beliefs. Shifts in credit conditions do not move house prices but are important for the dynamics of home ownership, leverage, and foreclosures. The role of housing rental markets and long-term mortgages in alleviating credit constraints is central to these findings. Second, our model suggests that the boom-bust in house prices explains half of the corresponding swings in non-durable expenditures and that the transmission mechanism is a wealth effect through household balance sheets. Third, we find that a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures, but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.
Keywords: Housing Market; Economic Fluctuations; Debt Forgiveness; Consumption Dynamics
JEL Codes: D10; D31; E21; E30; E40; E51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shifts in beliefs about future housing demand (R21) | house price movements (R31) |
| house price movements (R31) | leverage (G24) |
| shifts in beliefs about future housing demand (R21) | rent-price ratio (R31) |
| house price movements (R31) | nondurable expenditures (E20) |
| initial share of housing wealth (G51) | consumption during the bust (E21) |
| debt forgiveness programs (H63) | foreclosures (G21) |
| debt forgiveness programs (H63) | consumption during recovery (E21) |