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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Collateral Constraints and Macroeconomic Asymmetries
Luca Guerrieri and Matteo Iacoviello
2013-1082  (June 2013)

Abstract:  A model with collateral constraints displays asymmetric responses to house price changes. When housing wealth is high, collateral constraints become slack, and the response of consumption and hours to shocks that move house prices is positive yet small. When housing wealth is low, collateral constraints become tight, and the response of consumption and hours to house price changes is negative and large. This finding is corroborated using evidence from national, state-level, and MSA-level data. Wealth effects computed in normal times may underestimate the response to large house price declines. Debt-relief policies may be far more effective during protracted housing slumps.

Full paper (395 KB PDF)

Housing, collateral constraints, occasionally binding constraints, household leverage

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