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Household Debt and Foreign Capital Flows

Author

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  • Giorgio Primiceri

    (Northwestern University)

  • Andrea Tambalotti

    (Federal Reserve Bank of New York)

  • Alejandro Justiniano

    (Federal Reerve Chicago)

Abstract

We analyze the macroeconomic effects of variations in household leverage in an open economy using a quantitative general equilibrium model. The framework features debt by borrowers limited to a fraction of the market value of their real estate holdings, which serve as collateral. Domestic and foreign savers supply funds through a domestic intermediation sector. The main objective of the study is to characterize the interaction between changes in the supply of foreign capital (the international savings glut) and the credit and housing boom and bust in the United States. We do so within a tractable, quantitative macroeconomic model with rich transmission mechanisms and a realistic structure of mortgage contracts. This framework allows us to quantify the extent to which the flow of funds from abroad might have represented an engine, and/or an amplification mechanism, of the leverage cycle experienced by the US economy in the last decade. We rely on data from the Survey of Consumer Finances, NIPA and TICS to calibrate parameters and to inform our experiments.

Suggested Citation

  • Giorgio Primiceri & Andrea Tambalotti & Alejandro Justiniano, 2013. "Household Debt and Foreign Capital Flows," 2013 Meeting Papers 964, Society for Economic Dynamics.
    • Handle: RePEc:red:sed013:964
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    References listed on IDEAS

    as
    1. Klaus Adam & Pei Kuang & Albert Marcet, 2012. "House Price Booms and the Current Account," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 77-122.
    2. Jack Favilukis & Sydney C. Ludvigson & Stijn Van Nieuwerburgh, 2017. "The Macroeconomic Effects of Housing Wealth, Housing Finance, and Limited Risk Sharing in General Equilibrium," Journal of Political Economy, University of Chicago Press, vol. 125(1), pages 140-223.
    3. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-393, March.
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