Abstract
We build a model of the US economy with multiple aggregate shocks that generate fluctuations in equilibrium house prices. Through coun-terfactual experiments, we study the housing boom-bust around the Great Recession, with three main results. First, the main driver of movements in house prices and rents was a shift in beliefs, not a change in credit conditions. Second, the boom-bust in house prices explains half of the corresponding swings in nondurable expenditures through a wealth effect. Third, 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.
Original language | English (US) |
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Pages (from-to) | 3285-3345 |
Number of pages | 61 |
Journal | Journal of Political Economy |
Volume | 128 |
Issue number | 9 |
DOIs | |
State | Published - Sep 1 2020 |
All Science Journal Classification (ASJC) codes
- Economics and Econometrics