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Housing and Debt Over the Life Cycle and Over the Business Cycle

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  • Matteo Iacoviello

    (Federal Reserve Board of Governors)

  • Marina Pavan

    (Universitat Jaume I)

Abstract

We study housing and debt in a quantitative general equilibrium model. In the cross-section, the model matches the wealth distribution, the age profiles of homeownership and mortgage debt, and the frequency of housing adjustment. In the time-series, the model matches the procyclicality and volatility of housing investment, and the procyclicality of mortgage debt. We use the model to conduct two experiments. First, we investigate the consequences of higher individual income risk and lower downpayments, and find that these two changes can explain, in the model and in the data, the reduced volatility of housing investment, the reduced procyclicality of mortgage debt, and a small fraction of the reduced volatility of GDP. Second, we use the model to look at the behavior of housing investment and mortgage debt in an experiment that mimics the Great Recession: we find that countercyclical Önancial conditions can account for large drops in housing activity and mortgage debt when the economy is hit by large negative shocks.

Suggested Citation

  • Matteo Iacoviello & Marina Pavan, 2009. "Housing and Debt Over the Life Cycle and Over the Business Cycle," Boston College Working Papers in Economics 723, Boston College Department of Economics, revised 19 Sep 2011.
    • Handle: RePEc:boc:bocoec:723
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    More about this item

    Keywords

    Housing; Housing Investment; Household Debt; Life-cycle Models; Income Risk; Homeownership; Dynamic Stochastic General Equilibrium Models.;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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