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Interest rates following financial re-regulation

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  • Jeffrey R. Campbell
  • Zvi Hercowitz

Abstract

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.

Suggested Citation

  • Jeffrey R. Campbell & Zvi Hercowitz, 2010. "Interest rates following financial re-regulation," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 34(Q I), pages 2-13.
    • Handle: RePEc:fip:fedhep:y:2010:i:qi:p:2-13:n:v.34no.1
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    References listed on IDEAS

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    1. Campbell, Jeffrey R. & Hercowitz, Zvi, 2009. "Welfare implications of the transition to high household debt," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 1-16, January.
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    Keywords

    Interest rates; Housing - Finance;

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