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The macroeconomic transition to high household debt

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  • Jeffrey R. Campbell
  • Zvi Hercowitz

Abstract

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 lending from the wealthy to the middle class to evaluate the positive and normative aspects of the transition to a high debt economy. Using the model, we interpret evidence on the changing distribution of assets and debt as well as macro time series since 1982.

Suggested Citation

  • Jeffrey R. Campbell & Zvi Hercowitz, 2006. "The macroeconomic transition to high household debt," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
    • Handle: RePEc:fip:fedfpr:y:2006:i:nov:x:1
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    References listed on IDEAS

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    Cited by:

    1. Mark Doms & John Krainer, 2007. "Innovations in mortgage markets and increased spending on housing," Working Paper Series 2007-05, Federal Reserve Bank of San Francisco.
    2. Mark Doms & Frederick T. Furlong & John Krainer, 2007. "Subprime mortgage delinquency rates," Working Paper Series 2007-33, Federal Reserve Bank of San Francisco.

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