The Role of Collateralized Household Debt in Macroeconomic Stabilization

Market innovations following the financial reforms of the early 1980s relaxed collateral constraints on household borrowing. The present paper examines the contribution of this development to the macroeconomic stabilization that occurred shortly thereafter. The model combines collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium setup. We use this tool to characterize the business cycle implications of lowering required down payments and rates of amortization for durable goods purchases as in the early 1980s. The model predicts that this relaxation of collateral constraints can explain a large fraction of the actual volatility decline in hours worked, output, household debt, and household durable goods purchases.

Liquidity constraints of the middle class

There is evidence that a household's consumption response to transitory income does not decline, and perhaps increases, with the level of financial assets it holds. That is, middle class households with assets act as if they face liquidity constraints. This paper addresses this puzzling observation with a model of impatient households that face a large recurring expenditure. In spite of impatience, they save as this expenditure draws near. The authors call such saving made in preparation for a foreseeable event at a given future date "term saving." Term saving reverses the role of assets in the presence of liquidity constraints.

Interest rates following financial re-regulation

This article uses a calibrated general-equilibrium model of lending from the wealthy to the middle class to evaluate the effects of tightening household lending standards. The authors simulate a rise in down payment and amortization rates from their average values in the late 1990s and early 2000s to levels more typical of the era before the financial deregulation of the early 1980s. Their results show a drop in loan demand. This substantially lowers interest rates for an extended period. Counterintuitively, tightening lending standards makes borrowers better off.Interest rates ; Housing - Finance

The role of households' collateralized debts in macroeconomic stabilization

Market innovations following the financial reforms of the early 1980's relaxed collateral constraints on households' borrowing. This paper examines the implications of this development for macroeconomic volatility. We combine collateral constraints on households with heterogeneity of thrift in a calibrated general equilibrium model, and we use this tool to characterize the business cycle implications of realistically lowering minimum down payments and rates of amortization for durable goods purchases. The model predicts that this relaxation of collateral constraints can explain a large fraction of the volatility decline in hours worked, output, household debt, and household durable goods purchases.Households - Economic aspects ; Macroeconomics ; Labor supply

The macroeconomic transition to high household debt

Aggressive deregulation of the household debt market in the early 1980s triggered innovations that greatly reduced the required home equity of U.S. households, allowing them to cash-out a large part of accumulated equity. In 1982, home equity equaled 71 percent of GDP; so this generated a borrowing shock of huge macroeconomic proportions. The combination of increasing household debt from 43 to 56 percent of GDP with high interest rates during the 1982-1990 period is consistent with such a shock to households’ demand for funds. This paper uses a quantitative general equilibrium model of lending from the wealthy to the middle class to evaluate the positive and normative aspects of the transition to a high debt economy. Using the model, we interpret evidence on the changing distribution of assets and debt as well as macro time series since 1982.Finance, Personal ; Households - Economic aspects

Welfare implications of the transition to high household debt

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.Debt ; Mortgage loans ; Welfare

PRODUCTIVITY AND EFFICIENCY OF SMALL AND LARGE FARMS IN MOLDOVA

The paper presents a comparative analysis of the productivity of small and large farms in Moldova based primarily on cross-section data from three farm surveys conducted by the World Bank and USAID in 2000 and 2003. The survey data are supplemented where feasible with time series from official national-level statistics. We calculate partial land and labor productivity, total factor productivity, and technical efficiency scores (using Stochastic Frontier and Data Envelopment Analysis algorithms) for the two categories of small individual farms and large corporate farms. Our results demonstrate with considerable confidence that small individual farms in Moldova are more productive and more efficient than large corporate farms. This finding is not restricted to Moldova, as a similar result has been obtained by other authors in Russia (2005) and in the U.S. (2002), where a recent study has found that an increase of farm size reduces, rather than increases, agricultural productivity. Policies encouraging a shift from large corporate farms to smaller individual farms, rather than the reverse, can be expected to produce beneficial results for Moldovan agriculture and the economy in general. The government of Moldova should abandon its inherited preference for large-scale corporate farms and concentrate on policies to improve the operating conditions for small individual farms. At the very least, the government should ensure a level playing field for farms of all sizes and organizational forms, and desist from biasing its policies in favor of large farms.family farms, corporate farms, comparative performance, technical efficiency, total factor productivity, agrarian reforms, transition countries, Farm Management, D24, J24, P27, P31, P32, Q12, Q15, R14,

The dynamics of work and debt

This paper characterizes the labor supply and borrowing of a household facing collateral requirements that limit its debt and compel it to accumulate equity in its durable goods stock. The household's discount rate exceeds the market rate of interest, so it would otherwise finance increased current consumption by borrowing against future wages. Collateral constraints generate a positive comovement between the household's debt, the stock of durable goods and labor supply following wage or interest rate shocks---as the household's labor supply adjusts to finance down payments on new durable good purchases and the subsequent debt repayment. Increasing the speed of debt repayment amplifies these movements.Labor supply ; Bank loans ; Consumer credit ; Debt

The financial labor supply accelerator

The financial labor supply accelerator links hours worked to minimum down payments for durable good purchases. When these constrain a household's debt, a persistent wage increase generates a liquidity shortage. This limits the income effect, so hours worked grow. The mechanism generates a positive comovement of labor supply and household debt, the strength of which depends positively on the minimum down-payment rate. Its potential macroeconomic importance comes from these labor supply fluctuations' procyclicality. This paper examines the comovement of hours worked and debt at the household level with PSID data before and after the financial deregulation of the early 1980s which reduced effective down payments and compares the evidence with results from model-generated data. The household-level data displays positive co-movement between hours worked and debt, which weakens after the financial reforms. An empirically realistic reduction of the model's required down payments generates a quantitatively similar weakening.Labor supply ; Wages ; Hours of labor - Mathematical models