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Welfare implications of the transition to high household debt

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  • Jeffrey R. Campbell
  • Zvi Hercowitz

Abstract

Aggressive deregulation of the mortgage market in the early 1980s triggered innovations that greatly reduced the required home equity of U.S. households. This allowed households to cash-out a large part of accumulated equity, which equaled 71 percent of GDP in 1982. A borrowing surge followed: Household debt increased from 43 to 62 percent of GDP in the 1982- 2000 period. What are the welfare implications of such a reform for borrowers and savers? This paper uses a calibrated general equilibrium model of lending from the wealthy to the middle class to evaluate these effects quantitatively.

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  • Jeffrey R. Campbell & Zvi Hercowitz, 2006. "Welfare implications of the transition to high household debt," Working Paper Series WP-06-27, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:wp-06-27
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    References listed on IDEAS

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    Keywords

    Debt; Mortgage loans; Welfare;
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