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The Macroeconomic Effects of Debt Relief Policies During Recessions

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  • Soyoung Lee

Abstract

I study debt relief as a stimulus policy using a dynamic stochastic general equilibrium model that captures the rich heterogeneity in households’ balance sheets. In this environment, a large-scale mortgage principal reduction can amplify a recovery, support house prices and lower foreclosures. The nature of the intervention, in terms of its eligibility, liquidity and financing, shapes its macroeconomic impact. This impact rests on how resources are redistributed across households that vary in their marginal propensities to consume. The availability of bankruptcy on unsecured debt quantitatively changes the macroeconomic response to large-scale mortgage relief by reducing precautionary savings.

Suggested Citation

  • Soyoung Lee, 2023. "The Macroeconomic Effects of Debt Relief Policies During Recessions," Staff Working Papers 23-48, Bank of Canada.
    • Handle: RePEc:bca:bocawp:23-48
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    More about this item

    Keywords

    Business fluctuations and cycles; Credit and credit aggregates; Debt management; Housing;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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