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Schumpeter Lecture 2019: Slow Household Deleveraging

Author

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  • Veronica Guerrieri
  • Guido Lorenzoni
  • Marta Prato

Abstract

We use a model of precautionary savings with housing and mortgages to study the effects of a deleveraging shock on consumer spending. We focus on the deleveraging caused by a contraction in home values, and compute numerically the partial-equilibrium effect of the shock. Our simulations show that household deleveraging is associated with a long and protracted weakness in consumption. These effects appear even if we assume, realistically, that housing wealth is illiquid and mortgage debt is long term. We show that housing wealth matters for consumption decisions due to an insurance force: consumers know they can sell their house if they get hit by sufficiently negative shocks in the future. We also show that our slow deleveraging mechanism is amplified when incomes are affected by a weak aggregate consumption demand through general-equilibrium effects.

Suggested Citation

  • Veronica Guerrieri & Guido Lorenzoni & Marta Prato, 2020. "Schumpeter Lecture 2019: Slow Household Deleveraging," Journal of the European Economic Association, European Economic Association, vol. 18(6), pages 2755-2775.
    • Handle: RePEc:oup:jeurec:v:18:y:2020:i:6:p:2755-2775.
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    File URL: http://hdl.handle.net/10.1093/jeea/jvaa049
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    Cited by:

    1. Yuki SHIGETA, 2022. "A Continuous-Time Utility Maximization Problem with Borrowing Constraints in Macroeconomic Heterogeneous Agent Models:A Case of Regular Controls under Markov Chain Uncertainty," Discussion papers e-22-009, Graduate School of Economics , Kyoto University.
    2. Adél Bosch & Matthew W. Clance & Steven F. Koch, 2021. "Household debt and consumption dynamics: A non-developed world view following the ï¬ nancial crisis," Working Papers 868, Economic Research Southern Africa.
    3. R. Anton Braun & Daisuke Ikeda, 2021. "Monetary Policy over the Lifecycle," IMES Discussion Paper Series 21-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
    4. Adél Bosch & Matthew Clance & Steven F. Koch, 2022. "Household debt and consumption dynamics A non-developed world view following the financial crisis," Applied Economics, Taylor & Francis Journals, vol. 54(8), pages 897-917, February.
    5. Braggion, Fabio & Manconi, Alberto & Zhu, Haikun, 2023. "Household credit and regulatory arbitrage: Evidence from online marketplace lending," Other publications TiSEM 9fbc0f2e-26f5-414f-8384-c, Tilburg University, School of Economics and Management.
    6. Yuki SHIGETA, 2022. "Existence of Invariant Measure and Stationary Equilibrium in aContinuous-Time One-Asset Aiyagari Model:A Case of Regular Controls under Markov Chain Uncertainty," Discussion papers e-22-010, Graduate School of Economics , Kyoto University.

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