The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Federal Reserve Bank of Chicago
The Role of Collateralized Household
Debt in Macroeconomic Stabilization
Jeffrey R. Campbell and Zvi Hercowitz
REVISED December, 2006
WP 2004-24
The Role of Collateralized Household Debt in
Macroeconomic Stabilization∗
Jeffrey R. Campbell† Zvi Hercowitz‡
December 2006
Abstract
Market innovations following the financial reforms of the early 1980s drastically
reduced equity requirements associated with collateralized household borrowing. This
paper examines the contribution of this development to the macroeconomic stabilization
that occurred shortly thereafter. The model combines collateralized household debt
with heterogeneity of time preference in a calibrated general equilibrium setup. We
use this framework 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 reduction of equity requirements can explain a
large fraction of the actual volatility decline in hours worked, output, household debt,
and household durable goods purchases.
JEL Classification: E32, E65.
Keywords: Consumer Credit, Housing, Deregulation, Labor Supply, Business Cycle Stabilization.
∗
Gadi Barlevy, Mariacristina De Nardi, Jonas Fisher, Nir Jaimovich, and Richard Suen graciously provided
insightful comments. We are grateful to the National Science Foundation for research support through Grant
0137048 to the NBER.
†
Federal Reserve Bank of Chicago and NBER. e-mail: jcampbell@frbchi.org
‡
Tel Aviv University. e-mail: zvih@post.tau.ac.il
1
Introduction
This paper examines the implications of the household credit market reforms in the early
1980s for macroeconomic volatility. Homes and other durable goods collateralize most household debt in the United States, and typical debt contracts require the borrower to take an
equity stake in the good that serves as collateral. A down payment imposes an initial equity
share on the durable good purchased, and the debt’s amortization dictates the pace at which
the equity share increases. The market innovations that followed the Monetary Control Act
of 1980 and the Garn-St. Germain Act of 1982 greatly reduced these equity requirements, and
the well known decline in macroeconomic volatility occurred a short time after the reforms.
Because the stabilization was particularly dramatic for residential investment, Stock and
Watson (2002, 2003) suggest that these reforms substantially contributed to it. An examination of the behavior of household debt, reported below, supports such a link. Debt starts
to accelerate at about the same time that macroeconomic volatility drops, and its standard
deviation goes down more than most key aggregates’. This evidence motivates us to measure
the effects of households’ equity requirements on macroeconomic volatility. For this purpose,
we use a tractable quantitative general equilibrium model of business cycles with household
debt.
In the model, debt contracts require the borrower to hold an equity stake in the good
that serves as collateral, as do most debt contracts in the United States. Equity requirements
could be generated by borrowers’ inability to commit to repayment combined with costly
repossession, as in Kiyotaki and Moore (1997). However, the history of mortgage markets
strongly suggests that the large changes in equity requirements follow regulatory changes.
Accordingly, our analysis treats equity requirements as exogenous policy choices.
Household debt in the model reflects trade between two households with different rates of
time preference, which we label the saver and the borrower. The saver represents the few very
wealthy households who own most assets in the United States, while the borrower represents
the other households who owe most debt. Both have infinite lives and the only source of
uncertainty is an aggregate productivity shock, so the model incorporates the most salient
features of the U.S. household debt market without the complications of intergenerational
trade or idiosyncratic risk.
In equilibrium, the borrower owns nothing but the required equity stake in the durable
goods that collateralize household debt. When expanding purchases of home capital goods,
the borrower must increase labor supply to finance down payments. The higher labor supply
persists because of debt repayment. Fortin’s (1995) and Del Boca and Lusardi’s (2003)
1
findings that the labor supply of married women increases with their households’ mortgage
debts supports such a connection between labor supply and household debt. Reducing the
equity requirement—by lowering the down-payment rate or extending the term of the loans—
weakens the link between durable purchases, debt, and hours worked; and thereby results in
lower aggregate variability.
Households’ equity requirements generate a transmission mechanism that can be contrasted with the financial accelerator effect for investors in Bernanke and Gertler (1989)
or Kiyotaki and Moore (1997). In those models, an exogenous increase in net worth of
borrowing-constrained investors is transmitted to higher investment. Iacoviello (2005) extended that framework to include a similar borrowing constraint for households. In his
model, a real estate appreciation raises output demand through its effect on households’ net
worth. The mechanism in this paper works quite differently. Here, it is not the availability of internal funds or collateral value that motivates further economic activity, but it is
their shortage: A shock that increases borrowers’ demand for durable goods creates a need
for funds to comply with the equity requirements. This in turn induces further economic
activity by expanding labor supply. This channel relies on the connection between debt
and durable goods purchases, so it does not arise in economies with a fixed minimum for
household net worth, such as Krusell and Smith’s (1998).
Our analysis of the role of equity requirements in business fluctuations starts with standard preferences and production possibilities. With this specification, output volatility depends primarily on the variance of productivity shocks—as in the basic Real Business Cycle
model—because inputs vary relatively little. Hence, lowering equity requirements reduces
output’s volatility modestly in spite of a substantial stabilization of hours worked. Following
King and Rebelo (2000), we then introduce preferences and production possibilities that reduce the size of the exogenous shocks consistent with a given volatility of output. This version
of the model predicts that lowering equity requirements substantially reduces macroeconomic
volatility.
The remainder of this paper proceeds as follows. The next section reviews the history of
household debt markets and the cyclical behavior of household debt. Section 3 presents the
model, and in Section 4 the model’s steady state is used to analyze long-run responses to a
financial market reform. Section 5 builds intuition by analyzing the labor supply decision
in partial equilibrium. The quantitative results from calibrated versions of the model are
reported in Section 6, and Section 7 concludes.
2
2
Household Debt in the United States
This section provides context for our analysis by reviewing evidence on household debt in the
U.S. economy. It begins with a brief history of credit market institutions and policies and
concludes with an analysis of the household debt’s cyclical behavior since the Korean War.
Before proceeding, we document two basic aspects of household debt which remain unchanged since the early 1960s. First, the vast majority of household debt is collateralized.
According to the Survey of Financial Characteristics of Consumers, homes and vehicles collateralized 85 percent of total U.S. household debt in 1962. The analogous percentage from
the 2001 Survey of Consumer Finances is 90 percent. Appendix A details the sources of these
observations. Accordingly, the remainder of this paper abstracts from unsecured debt.
Second, according to these two surveys, the middle class owes most collateralized household debt, and rich households hold most of the financial assets. In 1962, households between
the tenth and ninetieth percentiles of the wealth distribution owed 79.5 percent of household
debt. In 2001, the corresponding figure is 72.7 percent. The funds for the financial sector
that directly holds this debt come from wealthy households. Those with wealth above the
ninetieth percentile held 54.2 percent of financial assets in 1962 and 72.8 percent in 2001.
Thus, most household debt reflects intertemporal exchange between middle class and wealthy
households rather than financial trade among the wealthy or lending to the poor. The concentration of assets in a small fraction of households and the distribution of debt across a
large fraction of households will be key features of the model presented below.
2.1
A Brief History of Household Credit Markets
Prior to the Great Depression, typical mortgage payments were only interest, and homeowners refinanced their loans’ principles every few years. Semer et al. (1986) report that first
mortgages had low loan-to-value ratios, but second and third mortgages with higher interest
rates were common. For other household durable goods, a multitude of finance companies
provided installment credit through retailers (Olney (1991)).
The Great Depression and its aftermath affected these two segments of the household
lending market quite differently. Federal involvement in the mortgage market became massive, while other household credit was regulated much less. Deflation during the depression
period eroded housing values without affecting nominal balances due at maturity, so many
borrowers were unable to find lenders to refinance their loans. The resulting defaults motivated the Hoover and Roosevelt administrations to exercise greater federal control over
3
mortgage lending.
The Federal Home Loan Bank Act of 1932 and the Home Owners’ Loan Act of 1933
established a new environment for mortgage lending based on three regulatory principles.
First, regulation constrained savings and loans to raise most of their funds with short-term
deposits. Congress intended this to insulate the mortgage market from fluctuations in other
financial markets. Second, the federal government became savings and loans’ lender of last
resort. Finally, long-term amortized mortgages replaced the previous interest-only, periodically refinanced mortgages. This reduced the possibility of systemic default risk at the cost
of raising borrowers’ required equity in their homes.
The maturity imbalance between Savings and Loans’ long-term assets and short-term
liabilities posed no challenge in a stable monetary environment, but the volatile financial
markets of the late 1960s and 1970s pushed many savings and loans into insolvency. By
1980, the Volker monetary policy made the Savings and Loans’ regulatory environment unsustainable. The federal government abandoned the New Deal regulatory system with the
Monetary Control Act of 1980 and the Garn-St.Germain Act of 1982. Florida (1986), and the
articles contained therein describe how this legislation eliminated restrictions on mortgage
lending and reintegrated it with other financial markets.
Figure 1 illustrates the implications of credit market regulation since 1954. It plots the
ratio of mortgage debt to the value of owner-occupied housing, and the ratio of total household
debt to total tangible assets—owner-occupied housing and durable goods.1 The rapid increase
in the early part of the sample reflects the relaxation of residential credit controls near the
end of the Korean War. This trend partially reverses in 1966 with the extension of interest
rate ceilings on demand deposits (Regulation Q) to Savings and Loans. The ratio declined
through the financial volatility of the late 1960s and 1970s. At the end of 1982 the debtasset ratios start a new dramatic increase. This surge reflects the emergence of the subprime
mortgage lending market and households’ greater use of home equity loans and mortgage
refinancing to cash-out previously accumulated equity. Greater access to refinancing and
home equity loans allowed homeowners to delay repayment of mortgage principle, and access
to additional subprime mortgages reduced effective down payment requirements. After 1995,
the ratios of household debt to tangible assets stabilize at new and higher levels.
Although only the mortgage market underwent dramatic regulatory changes, the automobile loan market also changed substantially. For the 1920s, Olney (1991) reports typical terms
1
The source of these observations is the Federal Reserve Flow of Funds Accounts, Table B.100, Balance
Sheet of Households and Nonprofit Organizations.
4
of car loans of 1/3 down and a repayment period of 12-18 months. During the 1972-1982
period, the average figures are 13 percent down and repayment period of 40 months, while in
the 1995-2003 period, the corresponding averages are 8 percent down and repayment period
of 54 months.2 Hence, equity requirements in this market eased considerably over time.
2.2
The Cyclical Behavior of Household Debt
The financial developments at the end of 1982 preceded a fast increase in household debt
and a dramatic change in its cyclical behavior. Figure 2 shows the fluctuations of total
household debt and its comovement with hours worked. Household debt is expressed in real
terms by dividing nominal values by the GDP price index, and hours worked is an index of
total private weekly hours. Both variables are logged and HP-filtered. The figure shows two
phenomena. First, debt’s volatility declines dramatically in the early 1980s. Second, debt
and hours worked comove strongly until this time. Afterwards, their movements become
much less synchronized.
Tables 1 and 2 summarize these data using three sub-periods of the 1954:I–2005:III sample: (1) From the beginning of the sample through 1982:IV—the quarter of the Garn-St.
Germain Act’s passage—(2) from 1983:I onwards, and (3) from 1995:I onwards.
Table 1 reports the standard deviations of total household debt and mortgage debt along
with those of other key macroeconomic variables in these three periods. The standard deviation of total debt declines from 2.8 percent in the period through 1982:IV, to 0.6 percent from
1995:I onwards. The corresponding figures for mortgage debt are 2.3 percent and 0.8 percent. Table 1 also illustrates the decline in general macroeconomic volatility. The standard
deviations of hours worked, durable consumption expenditures, nondurable consumption expenditures, and GDP all fall substantially after 1982; and they are even lower from 1995
onwards. As stressed by Stock and Watson (2002, 2003), the decline in investment volatility
reflects primarily residential investment: Its standard deviation falls from 12 percent to 2.6
percent, while the standard deviation of nonresidential investment remains essentially unchanged. The final column reports the ratios of the standard deviations in the last period
to those in the first. By this measure, household debt, residential investment, and durable
goods purchases stabilize the most.
Table 2 quantifies the comovement of hours worked and debt. Prior to 1983, the correlation coefficients of total and mortgage debt with hours worked are 0.86 and 0.82, respectively.
These correlations are substantially lower after 1982.
2
The source of these observations is Federal Reserve Statistical Release G-19, Consumer Credit.
5
The levels of per-capita household debt and hours worked also changed. Figure 3 plots
their logarithms. Both variables were constructed using the civilian noninstitutional population 16 years and older. Debt starts to accelerate in 1983:I—consistently with the increase
in the ratio of household debt to tangible assets from Figure 1—and also hours worked per
capita begins then a persistent increase.
The evidence presented in this section indicates that the aggregate volatility decline since
the early 1980s was accompanied by a pronounced decline in the volatility of household debt.
Furthermore, household debt along with two closely-related variables, residential investment
and durable purchases, stabilize the most among the key variables considered. This paper
focuses on the possibility that the relaxation of equity requirements on households contributed
to the macroeconomic stabilization. For this analysis, we construct a quantitative general
equilibrium model with household debt.
3
The Borrower-Saver Model
In this model, household debt reflects intertemporal trade between an impatient borrower
and a patient saver. The saver owns all the productive capital and holds the borrowers’
debt. This reflects the fact that in the U.S. economy, few very wealthy households hold most
assets, and others owe most of the debt. Durable goods collateralize debt. We model the
credit market reform as an exogenous reduction of borrowers’ required equity in these durable
goods.
Without an equity requirement, the borrower’s debt to the saver would increase over time
to the maximum level the borrower can service using total labor income. Imposing an equity
requirement limits the debt, so the economy possesses a unique steady state with positive
consumption by both households. This requirement always limits the borrower’s debt if
the economy remains close to its steady state; so standard log-linearization techniques can
characterize its equilibrium for small disturbances. This is the solution approach we follow
below.
Next, we present the economy’s primitives, discuss the households’ optimization problems,
and define a competitive equilibrium.
3.1
Preferences
The preferences of savers and borrowers differ in two respects: One is that savers are more
patient, and the other is that savers do not work. The first assumption generates a concen6
tration of assets in a relatively small number of households. This follows Krusell and Smith’s
(1998) use of heterogeneity in thrift to generate an empirically realistic wealth distribution.
Simplicity justifies the assumption that savers do not work. Because there are few savers and
because they should each enjoy some of their wealth in the form of leisure, we expect them
to contribute little to aggregate labor supply. When we endow savers with the borrowers’
intratemporal preferences and calculate the steady state of the model calibrated as described
below, savers choose to not work at all unless they represent an inordinately large fraction of
the households. Accordingly, we simplify the model by abstracting from their labor supply.
In this case, no model statistics except consumption per saver and consumption per borrower
depend on the division of households into savers and borrowers.
Borrowers’ and savers’ specific utility functions are:
1−γ
∞
1 − N̂t
X
E
β̂ θ ln Ŝt + (1 − θ) ln Ĉt + ω
,
1−γ
t=0
#
∞
X
E
β̃ θ ln S̃t + (1 − θ) ln C̃t ,
0 < θ < 1, ω > 0, γ > 0, (1)
"
(2)
t=0
where β̂ < β̃. In (1), Ŝt , Ĉt , and N̂t are the borrower’s stock of durable goods—assumed
to be proportional to its service flow—consumption of nondurable goods, and labor supply.
The specification of the last term nests both a logarithmic form (γ = 1) and Hansen’s (1985)
linear form (γ = 0). In (2), S̃t , and C̃t are the saver’s consumption of the two goods.
3.2
Technology
The aggregate production function is Yt = K α (At Nt )1−α . Here, Yt is output, K is a constant
capital stock, Nt is labor input, At is an exogenous productivity index, and 0 ≤ α < 1.
The assumption that K is constant simplifies the analysis in an aspect that is marginal in
the present context—which focuses on household capital goods. Furthermore, capital stock
movements are slow and thus not important for output volatility. We discuss the implications
of relaxing this assumption below in Section 6.5. The productivity shock follows the AR(1)
stochastic process ln At = η ln At−1 + εt , where εt is an i.i.d. disturbance with zero mean and
constant variance and 0 ≤ η < 1. We abstract from growth in this paper.
7
Output can be costlessly transformed into nondurable consumption and durable goods
purchases. That is, Yt = Ct + Xt . Here, Ct represents aggregate nondurable consumption
and Xt = St+1 − (1 − δ) St is aggregate investment in the durable good, which depreciates
at the rate δ.
3.3
Trade
All trade takes place in competitive markets. The two households sell capital services and
labor to a representative firm and make loans to each other. We denote the rental rate of
capital and the wage rate, in units of consumption, with Ht and Wt . Assuming that unbacked
state-contingent claims are unenforceable, the only security traded is collateralized debt with
a period-by-period adjustable interest rate. The amounts B̂t+1 and B̃t+1 are the outstanding
debts of the two households at the end of period t, and the corresponding gross interest rate
is denoted Rt .
Exogenous equity requirements on the goods that serve as collateral constrain intertemporal trade between borrowers and savers. The equity requirements mimic a typical feature
of loan contracts in the United States: An equity share that potentially increases as the good
ages. This requirement is closely related to a down payment and a rate of debt amortization. The down payment reflects the initial equity share, and the rate of debt amortization
determines its subsequent path. The parameters capturing these features are 0 ≤ π < 1,
the initial equity share, and φ, which governs the speed of subsequent equity accumulation.
When a loan is collateralized by a durable good j periods old, the required equity share at
the time of the next debt payment is
ej = 1 −
1−φ
1−δ
j
(1 − π) .
(3)
For newly purchased goods (j = 0) , the equity share is just π. As the good ages (j increases),
the equity share increases towards one when φ > δ, and stays constant when φ = δ. The
history of U.S. debt markets reviewed above indicates that the change in households’ equity
shares in the early 1980s reflected a decision to deregulate. Here, we model this deregulation
by lowering π and φ.
For a household with positive debt, the total amount of equity at the beginning of period
t + 1 is (1 − δ)St+1 − Rt Bt+1 , where the durable stock is adjusted for depreciation and the
debt for accumulated interest. This household’s required equity in its durable goods stock
8
sums the equity requirements on the (depreciated) goods of all ages from (3):
(1 − δ)St+1 − Rt Bt+1 ≥ (1 − δ)
∞
X
(1 − δ)j Xt−j ej .
(4)
j=0
If the constraint in (4) always binds for a household, then it has the following recursive
representation for the debt:
Bt+1 =
(1 − φ) Rt−1
(1 − δ) (1 − π)
Xt +
Bt .
Rt
Rt
(5)
In (5), the expression (1 − δ) (1 − π) /Rt is the loan-to-value ratio for new purchases, and
(1 − φ) Rt−1 /Rt is one minus the rate of amortization of the outstanding debt. In this formulation, the equity constraint is expressed as a flexible borrowing constraint, depending on
current durable purchases and the outstanding debt.
In this environment, the two households choose asset holdings, consumption of the two
goods, and (for the borrower) labor supply to maximize utility subject to the budget and the
borrowing constraints. Firms choose their outputs and inputs to maximize their profits.
3.4
Utility Maximization
The condition that the market in collateralized debt must clear implies that the equity
constraint binds for one type of household at most. We conjecture that near the steady state it
binds for the borrower. After characterizing the steady state, verifying this is straightforward.
We now turn to the analysis of the households’ utility maximization problems, given this
conjecture.
3.4.1
Utility Maximization by the Borrower
We consider first the borrower’s problem, given the assumption that the equity constraint in
(4) always binds. In this case, its debt is constrained to evolve as
B̂t+1 =
(1 − δ) (1 − π)
(1 − φ) Rt−1
X̂t +
B̂t .
Rt
Rt
(6)
The binding equity constraint also implies that the borrower never purchases productive
capital, so the corresponding budget constraint is
Ĉt + X̂t = Wt N̂t + B̂t+1 − Rt−1 B̂t .
(7)
9
Given R−1 B̂0 and Ŝ0 , the borrower chooses state-contingent sequences of Ĉt , X̂t , N̂t , and
B̂t+1 to maximize the utility function in (1), subject to the sequences of constraints in (6)
and (7).
Denote the current-value Lagrange multiplier on (7) with Ψt . If we express the Lagrange
multiplier on (6) as Ξt Ψt , then Ξt measures the value in units of either consumption good of
marginally relaxing the equity constraint.
In addition to the two constraints and the transversality conditions, limt→∞ β̂ t E [Ψt ] =
limt→∞ β̂ t E [Ψt Ξt ] = 0, the optimality conditions for this maximization problem are
Ψt =
1−θ
Ĉt
"
,
(8)
θ Ĉt
Ψt+1
(1 − π) (1 − δ)
= β̂E
+ (1 − δ)
1 − Ξt
Rt
1 − θ Ŝt+1
Ψt
(1 − π) (1 − δ)
1 − Ξt+1
Rt+1
#
,
(9)
−γ Ĉ
t
Wt = ω 1 − N̂t
,
1
−
θ
Ψt+1
Ψt+1
Rt
Ξt = 1 − β̂E
Rt + (1 − φ) β̂E
Ξt+1
.
Ψt
Ψt
Rt+1
(10)
(11)
Equation (8) looks familiar, but the equity constraint changes its interpretation. For an
unconstrained household, such as the saver, it defines the value of relaxing the intertemporal
budget constraint. The borrower cannot freely substitute intertemporally, so Ψt represents
only the marginal value of additional current resources.
A standard condition for optimal investment in durable goods equates the purchase price
of a durable good to its immediate payoff (the marginal rate of substitution between durable
and nondurable goods) plus its discounted expected resale value. Equation (9) has the same
interpretation if we define 1 − Ξt (1 − π) (1 − δ)/Rt to be the effective purchase price of
the durable good for the borrower. This is the actual price less the benefit from relaxing
the borrowing constraint by purchasing an additional unit—which allows borrowing at the
maximum loan-to-value ratio.
Equation (10) is the consumption-leisure condition. It has the usual form because it
involves only intratemporal substitution, which is not affected by the financial market imperfections.
Setting Ξt and Ξt+1 to zero reduces (11) to the standard Euler equation. When the equity
constraint always binds, Ξt in (11) can be interpreted as the price of an asset which allows
10
the holder to expand its debt by (1 − φ)j (Rt /Rt+j ), j ≥ 0, in period t + j. It equals the
payoff to additional current borrowing—the violation of the standard Euler equation—plus
the asset’s appropriately discounted expected resale value.
3.4.2
Utility Maximization by the Saver
The maximization problem of the saver is standard, but we describe its solution here for
the sake of completeness. We impose the ownership of the entire capital stock on the saver,
since the borrower never owns capital if (5) always binds. Given the constant stock, K̃, and
the initial durable goods and savings in the borrower’s household debt, S̃0 and −R−1 B̃0 , the
saver chooses state-contingent sequences of C̃t , X̃t , and B̃t+1 to maximize utility subject to
C̃t + X̃t − B̃t+1 = Ht K̃ − Rt−1 B̃t .
(12)
The right-hand side of (12) sums the sources of funds: Capital rental revenue and the value
of previous savings. The left-hand side includes the three uses of these funds: Nondurable
consumption, purchases of durable goods, and current saving.
We denote the current-value Lagrange multiplier on (12) with Υt . The first-order conditions for the saver’s problem are
1−θ
,
C̃t
"
!#
θ C̃t+1
Υt+1
1 = β̃E
+1−δ
,
Υt
1 − θ S̃t+1
Υt+1
1 = β̃E
Rt ,
Υt
Υt =
(13)
(14)
(15)
and the budget constraint (12). Equation (14) is a typical condition for optimal purchases
of durable goods, and (15) is the standard Euler equation.
3.5
Production and Equilibrium
The representative firm takes the input prices as given. Letting Nt denote labor input used
by the firm, profit maximization implies that
α
K
1−α
,
(16)
Wt = (1 − α) At
Nt
α−1
K
1−α
Ht = αAt
.
(17)
Nt
11
With the economic agents’ maximization problems specified, we define a competitive equilibrium. Given the two households’ initial stocks of durable goods, Ŝ0 and S̃0 , the stock of
outstanding debt issued by the borrower and held by the saver, B0 = B̂0 = −B̃0 , the predetermined initial interest rate on this debt, R−1 , and the initial value of the technology shock,
a competitive equilibrium is a set of state-contingent sequences for all prices and the borrower’s, saver’s, and representative firm’s choices such that both households maximize utility
subject to the constraints, the representative firm maximizes its profit, the two households’
durable goods stocks evolve according to Ŝt+1 = (1 − δ) Ŝt + X̂t and S̃t+1 = (1 − δ) S̃t + X̃t ,
and input, product, and debt markets clear.
4
The Deterministic Steady State
We next characterize the economy’s steady state. In light of the substantial increases in the
ratio of debt to durable goods and in hours worked after 1982, we focus here on the level
effects of changing the equity requirement parameters π and φ.
In the steady state, the saver’s Euler equation immediately determines the interest rate,
R = 1/β̃. With R in hand, we calculate the borrower’s choices. Equation (11) implies that
Ξ=
1 − β̂/β̃
1 − β̂ (1 − φ)
> 0.
(18)
Hence, the equity constraint on the borrower binds at the steady state, as conjectured in
Section 3.4.
To solve for the steady state we proceed as follows. From (9), the borrower’s ratio of
durable to nondurable consumption is
Ŝ
Ĉ
=
θ
β̂
,
1 − θ (1 − Ξ (1 − π) (1 − δ) /R) 1 − β̂ (1 − δ)
(19)
and the borrower’s budget constraint can be rewritten as
Ĉ
W N̂
=
1
1 + (R − 1) B̂Ŝ ĈŜ + δ ĈŜ
.
(20)
To express these two ratios as functions of the primitive parameters we use (18) in (19), and
then the resulting expression as well as the debt accumulation constraint (5) into (20).
12
With the solution for the ratio of consumption to labor income in hand, the optimal
labor supply condition (10) determines N̂ . As Ĉ/(W N̂ ) declines, labor supply increases.
Obtaining W , H, and the rest of the borrower’s steady-state choices is then straightforward.
The steady-state capital rental rate, the outstanding household debt, and the steady-state
versions of (12) and (14) then determine the saver’s choices of C̃ and S̃.
The steady state can be used to examine the long-run implications of changes in equity
requirements. Lowering π has no impact on Ξ, but it directly increases Ŝ/Ĉ and B/Ŝ. Hence,
Ĉ/N̂ W decreases from (20), and N goes up according to (10). Intuitively, reducing the downpayment rate lowers the effective cost of durable goods to the borrower and thereby induces
a shift from leisure to durable
Also, the ratio of household debt to the aggregate
goods.
stock of durable goods, B/ Ŝ + S̃ , the model’s counterpart to the ratios plotted in Figure
1, increases as the down-payment rate declines.3
Lowering the rate of debt amortization, φ, has the same qualitative implications as reducing π. In this case, the decline in the effective cost of durable goods reflects an increase in Ξ.
Thus, the changes in the model’s steady state following a reduction in equity requirements—
lower down-payment and amortization rates—are qualitatively consistent with the long-run
changes in hours worked and debt observed in the U.S. economy after 1982. In Section 6.6,
we evaluate these effects quantitatively.
5
The Labor Supply Decision
To develop intuition for interpreting the next section’s quantitative results, we characterize
here the borrower’s response to wage changes in partial equilibrium. We compare the borrower’s labor supply across two regimes: Zero and positive equity requirements. To sharpen
this comparison, we also contrast the borrower’s labor supply behavior to a permanentincome consumer’s. This analysis demonstrates that labor supply responds only when there
is a positive equity requirement.
Assuming that Rt = R and φ = δ simplifies this discussion. If the borrower starts off
with no assets and no durable goods (B̂0 = Ŝ0 = 0), then B̂t = Ŝt (1 − π) (1 − δ)/R for all
3
The ratio S̃/B declines along with Ŝ/B. The effect on S̃/B can be shown using the budget constraints
α
N W.
of the two households and HK = (1−α)
13
t ≥ 1. Using this, the borrower’s budget constraint becomes
(1 − π) (1 − δ)
Ĉt + 1 −
Ŝt+1 = Wt N̂t + π(1 − δ)Ŝt ,
R
(21)
where the uses of funds appear as nondurable consumption and down payments on the desired
stock of durable goods, and the sources of funds are labor income and accumulated equity.
The first-order conditions can be now combined to yield
β̂
θĈt
(1 − θ)Ŝt+1
π (1 − δ)
Ψt+1
=u+
1 − β̂ER
,
R
Ψt
(22)
where u ≡ (R − 1 + δ)/R is the conventionally defined user cost of the durable good. In
(22), the marginal rate of substitution between Ŝt+1 and Ĉt equals the user cost—as it would
be for a permanent-income consumer—plus an additional positive term related to the equity
requirement. Note here that the term in square brackets is the deviation from the standard
Euler equation, which is positive when the equity constraint binds. We consider next the
labor supply response to a wage change in two equity requirement regimes.
5.1
Zero Equity Requirements
This case corresponds to π = 0. Given the assumption that φ = δ, the equity requirement
remains constant at the initial level (zero in this case) for any purchased durable good. The
borrower’s effective price of durable goods, defined above as 1−(1−π)(1−δ)/R, becomes now
the conventional user cost. This is also the relevant price in the first-order condition (22).
Here, an immediate and full adjustment of Ĉt and Ŝt+1 to the wage change, while leaving N̂t
constant, simultaneously satisfies both equations and the condition for N̂t in (10). Therefore,
a zero equity requirement eliminates completely the effects of wage fluctuations on labor
zt1−σ
v(1 − Nt ), where z is
supply. This result also holds for the more general utility function 1−σ
0
00
a CES aggregator of the two consumption goods and σ > 0, v > 0, v < 0. The same feature
of these preferences that King, Plosser, and Rebelo (1988) rely upon for balanced growth—
exactly offsetting income and substitution effects of permanent wage changes—drives the
invariance of labor supply to a wage change when π = 0.
Here, however, the insensitivity of N̂t to wage changes holds regardless of their persistence.
In other words, the income and the substitution effect of any wage change exactly cancel
each other. The borrower in this case behaves as a “rule-of-thumb” consumer, who spends all
14
current labor income (on nondurable consumption and on the user cost of the durable stock).
Hence, the borrower’s reaction under zero equity requirements differs substantially from the
permanent-income consumer’s, for which the persistence of any change is critical for the
strength of the income effect. This difference between the borrower and a permanent-income
consumer arises from the borrower’s limited access to the financial market. The permanentincome consumer is unconstrained in the financial market, while for the borrower, the zero
equity requirement limits debt. The constraint still binds because, as an impatient household,
the borrower would like to borrow beyond the total value of its durable goods.
5.2
Positive Equity Requirements
When π > 0, the presence of the required accumulated equity in the budget constraint (21)
makes the proportional adjustment to a wage change infeasible. Hence, the adjustment of
Ĉt and Ŝt+1 must be less than proportional to the wage. The optimal labor supply condition
(10) and the decline of Ĉt /Wt then imply that N̂t rises above its long-run level. This occurs
for both permanent and transitory wage changes.
From the borrower’s partial equilibrium responses it follows that labor supply fluctuations
in the model arise from the required accumulation of equity on durable goods. We now
proceed to evaluate this source of business cycle propagation quantitatively.
6
Quantitative Results
To assess the quantitative implications of this framework for macroeconomic volatility, we
solve the model and simulate the impact of the empirically relevant changes in household loan
markets. We consider first a regime of high equity requirements, for which the parameters
π and φ are matched to loan observations through 1982:IV. The effects of the financial
market reforms in the early 1980s are then assessed by considering a regime of low equity
requirements, which is matched to loan observations from the period from 1995:I onwards.
As shown in Figure 1, the latter period corresponds to a stabilization of the ratio of household
debt to tangible assets after the reforms. We interpret this as convergence of credit markets
to the new environment.
15
6.1
Calibration
Except for π and φ, all the parameters are held constant across the two regimes. We consider
two alternative values for γ, the parameter governing the elasticity of labor supply. In the
baseline case considered first, γ = 1—i.e., leisure enters utility in logarithmic form. In Section
6.4, we consider also the case of γ = 0, where leisure enters utility linearly.
The production function elasticity α equals 0.3. The parameters of the exogenous productivity shock process are set as follows. Using the value η = 0.95 from Hansen and Prescott
(2001), σε is calibrated so that the model’s standard deviation of output matches its actual
counterpart in the 1954:I–1982:IV sample. The resulting value is 0.0078. The same values
of η and σε are then used in the simulation of the second regime. The depreciation rate δ
is 0.01, the appropriately weighted average of 0.003 for owner occupied residences and 0.031
for cars.4
We chose β̃ so that the quarterly interest rate is one percent. Because the borrower’s
discount rate does not influence the interest rate, actual market rates are not useful for its
calibration. We set β̂ = 1/1.015, i.e., half of a percentage point higher than the interest rate.
This degree of impatience is similar in magnitude to that used by Krusell and Smith (1998).
Using a model with 3 levels of time preference, Krusell and Smith calibrate the differences
between each type as 0.36%; or 0.72% between the two extremes. We have experimented
with various values for this parameter with almost identical results to those reported below.
To calibrate π and φ, we utilize observations of automobile loans and mortgages. An average loan-to-value ratio is matched to the model’s steady-state counterpart (1 − δ) (1 − π) /R.
Given the values of R and δ, this equality is used to solve for the initial equity share π. The
steady-state amortization rate φ is equated to an average repayment rate. The inputs into
the calibration of the high- and low-equity requirement regimes are observations from the
Federal Reserve Board of loan terms from before 1983 and from 1995 onwards. Appendix B
describes the calibration of π and φ in detail. The resulting values are 0.16 and 0.0315 for
the high equity requirement regime and 0.11 and 0.0161 under low equity requirements. The
latter value of φ embodies an assumption that the current wide availability of home equity
loans and low-cost mortgage refinancing allows homeowners to delay repayment of mortgage
principle and so avoid accumulation of equity on their homes.
4
The source is “Fixed Assets and Consumer Durable Goods in the United States, 1925-97.” The service
life of 1-4 units residences is 80 years. Automobiles’ service life of 8 years is inferred from the reported
non-linear depreciation profile. We used the weights 0.75 and 0.25, which are the shares of the owner occupied
residential stock and consumer durable goods stock in the 1954-2004 sample.
16
The remaining parameters are θ and ω. We chose these simultaneously to match an
average share of hours worked of 0.3 and the average share of durable goods expenditure
in total households’ expenditures in the 1954:I-1982:IV sample of 0.21. To calculate this
ratio, we adjusted the NIPA’s nondurable personal consumption expenditures by subtracting
the imputed service flow of housing. We then added residential investment to personal
consumption expenditures on durable goods. Given the other parameters, including the
π and φ values for the high equity-requirement regime, the unique values of θ and ω that
replicate these observations are 0.37 and 1.395. Table 3 summarizes the calibrated parameter
values.
6.2
Household Borrowing and Aggregate Dynamics
We begin the quantitative analysis with a description of the two households’ simulated decisions in general equilibrium with the model calibrated to the high equity-requirement regime.
Figure 4 plots impulse responses of key variables to a positive productivity shock of 1/ (1 − α)
percent. All the variables are expressed as percent deviations from their steady-state values.
The price responses are not shown since they are similar to those in the standard RBC model:
The productivity shock directly shifts up labor demand, so the wage rises and thereafter falls
slowly to its steady-state level. The interest rate response has a similar shape, given the
increased demand for consumption by both households, but it is very small given their high
interest sensitivity.
The individual households’ responses illustrate the intertemporal exchange between them.
Although the productivity shock increases the rental income from capital, the saver’s durable
purchases and nondurable consumption reflect the higher interest rate: Durable consumption
declines and nondurable consumption trends upwards. Hence, the saver’s reaction is to
purchase the borrower’s debt; helping to finance a surge in the borrower’s consumption. As
in the partial equilibrium discussion in Section 5, the increase in hours worked by the borrower
reflects the equity requirements: Labor supply must increase to satisfy these requirements
on newly purchased durable goods.
An important characteristic of this model is that temporarily higher income induces the
borrower to increase debt—in contrast to the response of a permanent-income consumer,
who would save in order to smooth consumption. This arises because borrowing cannot be a
vehicle for consumption smoothing for equity constrained households. For them, purchases
of durable goods must accompany borrowing.
17
6.3
Equity Requirements and Aggregate Volatility
We turn now to the paper’s main issue: How important is the relaxation of equity requirements for aggregate dynamics? Figure 5 compares the impulse responses of aggregate variables under the two regimes, high and low equity requirements, to the same 1/ (1 − α) percent
increase in At .
In the low equity-requirement regime, the responses of hours worked and the debt have
about half the magnitude of the responses in the high-requirement regime. The response
of hours worked reflects the mechanism discussed in Section 5: Moving closer to a zero
equity requirement reduces the labor supply reaction to wage movements. The change in the
response of the debt follows mainly from the lower repayment rate. If φ > δ, a young durable
good has a lower equity requirement than an old one with the same after-depreciation value
to the owner. When a positive shock reduces temporarily the average age of the borrower’s
durable goods stock, its average equity requirement declines accordingly. Given that the
borrower fully exploits borrowing opportunities, the ratio of debt to durable goods overshoots
its long-run level. This overshooting is eliminated when φ = δ, because then age is irrelevant
for the required equity share on a durable good. Lowering the equity constraint makes φ
much closer to δ and greatly reduces debt overshooting.
Figure 5 also shows that the large proportional decline in the response of hours worked
produces only a small decline in the response of output. Given the standard utility and
production functions, the exogenous productivity shock dominates output dynamics. In the
next subsection, we follow King and Rebelo (2000) and introduce preferences and production
possibilities that enhance the contribution of labor fluctuations to output.
6.4
A High-Substitution Economy
Here we set γ = 0 in the borrowers’ utility function, leading to Hansen’s (1985) utility
specification. For savers, the utility function remains the same because there is no labor
supply decision.
The production structure is changed to increase the elasticity of output with respect to
labor, keeping the income shares of borrowers and savers calibrated at realistic values—which
is necessary for the quantitative results. The production function for final goods is
Yt = K α (At Nt )1−α
where Mt =
R
1
0
1−ϑ
Mtϑ , 0 < α < 1, 0 < ϑ < 1,
(23)
1/ρ
M (i)ρt di
is a composite of intermediate inputs. A profit maximizing
18
monopoly extracts each input from the ground at a constant marginal cost in units of final
output, and savers own all of these monopolies’ shares.
We set α = 0 and solve for the representative final good firm’s optimal level of Mt . Then,
we can express its value added as a linear function of labor input, Yt = κAt Nt , where κ is
a constant.5 The elasticity of output with respect to labor is now unity. However, labor’s
share in income is less than one because the savers receive monopoly profits. These profits
are the difference between total payments to the monopolies and their production costs. It
can be shown that savers’ share of income is ν = (1 − ρ) / (1/ϑ − ρ).
Given that in this economy the non-labor income share is ν, we now calibrate this parameter, and not α, as 0.3. Also σε is calibrated again. As with the baseline economy, we chose
its value so the standard deviation of output in the high equity-requirement regime equals
the standard deviation of output in the 1954:I-1982:IV period. Given the high-substitution
nature of this economy, this parameter is reduced from 0.0078 in the baseline economy to
0.0039. Finally, the requirement that N = 0.3 implies that ω = 2.77.
Figure 6 shows the impulse responses for the two regimes in this economy. The difference in output response between the high and low equity-requirement regimes is much more
pronounced than for the baseline economy, particularly on impact.
Table 4 presents the standard deviations of HP-filtered data from both economies. The
standard deviations for the baseline economy reflect the impulse response functions in Figure
5: The decline in volatility is concentrated in debt and hours.
The results are substantially different for the high-substitution economy, on which we
focus henceforth. The last column of Table 4 shows that, except for nondurable consumption,
volatility is substantially less in the low equity-requirement regime. For output, the ratio of
the standard deviation in the low-requirement regime to its high-requirement counterpart is
0.68. The actual ratio from periods 1995:I-2005:III and 1954:I-1982:IV in Table 1 is 0.53.
Hence, the present mechanism can reproduce a large part of the decline in output volatility.
Similarly for the debt: The model’s volatility ratio is 0.39, while the actual counterparts are
0.21 for the total debt and 0.35 for mortgage debt. The model reproduces the actual finding
that the decline in the volatility of the debt is the most pronounced.
The model also accounts for much of the dramatic stabilization of durable purchases.
The ratio of standard deviations from the low- and high-requirement regimes is 0.60. The
actual ratios for residential investment and durable consumption purchases are 0.22 and
α
5
1−α
The same reduced form can be obtained when the production function is Yt = (Xt ) (At Nt )
, Xt
is capital services determined by Xt = min {Ht K, Mt } , and Ht is the rate of capital utilization. In this
specification, intermediate inputs, such as energy sources, are a requirement for capital utilization.
19
0.36. The volatility decline in hours worked is larger in the model than in the data. The
model’s ratio is 0.54, and in the data it is 0.65. Nondurable consumption stabilizes in the
model only modestly: The volatility ratio is 0.93 while the actual ratio is 0.57. However,
the model captures the fact that durable purchases and residential investment stabilize more
than nondurable consumption, although to an exaggerated extent.
The model qualitatively reproduces the decline in the correlation of hours worked with
debt. The correlation goes down from 0.60 to 0.53 compared to actual decline from 0.86 to
0.11 for total debt, and from 0.82 to 0.33 for mortgage debt (Table 2). The larger decline in
the data could reflect uncorrelated measurement errors attached to hours worked and the real
debt, given that a reduction in the “true” volatility would augment the relative importance
of such errors and thereby reduce the estimated correlation.
6.5
Endogenous Capital Stock
We explore here the implications of allowing the capital stock to vary endogenously. A
variable capital stock gives the saver an additional avenue for intertemporal substitution.
Given the non-labor income share α(1 − ν) + ν = 0.3, we assume that α = 0.10 and hence
ν = 2/9. We also set the depreciation rate for physical capital to 0.025 per quarter. The
impulse responses from this economy display a well-known problem with models with multiple
capital stocks. Immediately following a shock there is a dramatic increase in productive
investment along with a similarly strong decline in savers’ purchases of durable goods. In
the following period the pattern is reversed. This instability reflects the lack of adjustment
costs for either one of the stocks. Productive investment is built first all-at-once, and then
the durable goods stock is increased. Introducing adjustment costs for at least one of the
stocks would alleviate this counterfactual behavior. Our assumption above that the capital
stock is constant represents an extreme form of adjustment costs.
The experiment of lowering the equity requirements in this economy yields similar results
as those obtained previously with the high-substitution economy. The ratio of the standard
deviation in the low equity-requirement regime to its high-requirement counterpart is 0.73,
which is somewhat higher than the 0.68 ratio in the previous results. Hours worked also
stabilizes somewhat less in this model. The ratio of its standard deviations is 0.52 instead of
0.54. There are two differences between this economy and that considered earlier, short-run
curvature in the production function and endogenous capital accumulation. The differences
between their results arise from the curvature of the production function. If we choose the
same values of α and ν in the high-substitution economy with a fixed capital stock, then
20
the ratios of standard deviations for output and hours worked are 0.78 and 0.60. When
the production function has curvature, stabilizing hours worked makes the equilibrium wage
more volatile. This partially offsets the original stabilization.
The economy with a variable capital stock and the original economy with a constant
capital stock represent two extreme specifications for adjustment costs, none and infinite.
Nevertheless, output substantially stabilizes in both economies when equity requirements
drop. This leads us to presume that parameterizations of adjustment costs for physical
capital that lie between these two extremes will also produce such an endogenous decline
in output variance. Extending the model to include business investment with more realistic
adjustment costs is therefore of interest, but it lies beyond the scope of this paper.
6.6
Comparison of Level Changes
Figures 1 and 3 indicate that the increase in the ratio of the debt to the durable stock following
the reforms in the early 1980s coincides approximately with a trend change in hours worked
per capita. The steady-state analysis predicts that both hours worked and the ratio of debt to
the durable stock should increase following a relaxation of equity requirements. Here, using
the parameter values and the model’s steady state, we evaluate these changes quantitatively,
and compare them to those from 1954:I-1982:IV to 1995:I-2005:III.
The percentage increase in average hours per-capita across these two sample periods is 5.8
percent. In the baseline economy, the steady-state increase from the high to the low equityrequirement regime is 5.0 percent, and in the high-substitution economy it is 7.2 percent.
Hence, the model predicts the order of magnitude of the change in hours worked. Regarding
the ratio of total debt to the durable stock, the average ratio for the period 1954:I-1982:IV
is 0.34, and for 1995:I-2005:III it is 0.45. The analogous ratios using mortgage debt are 0.32
and 0.42. The corresponding ratios in the high and low equity-requirements regimes (in both
model economies) are 0.17 and 0.33. The increase in the ratio of household debt to assets is
a fairly direct consequence of the relaxation of the equity constraint. It is more surprising,
however, that this financial change can also reproduce the observed increase in hours worked.
7
Conclusion
This paper studies the implications of equity requirements on households for macroeconomic
stability. The mechanism works through labor supply—lowering equity requirements weakens
the connection between constrained households’ durable purchases and their hours worked.
21
The striking change in the behavior of household debt and hours worked after the financial deregulation of the early 1980s coincided with the macroeconomic volatility decline.
We believe that this evidence warrants a focus on the link between household borrowing
and labor supply. The quantitative results indicate that weakening this link substantially
contributed to macroeconomic stability. Of course, other factors could contribute to the
stabilization. McConnell and Perez-Quiros (2000), Blanchard and Simon (2001), Kahn et al.
(2002), Stock and Watson (2002, 2003), and Campbell and Fisher (2004) discuss other explanations. One related to ours holds that financial liberalization may affect macroeconomic
volatility by increasing households’ ability to smooth consumption. However, as Blanchard
and Simon (2001) point out, this channel is not a promising route for explaining the greater
macroeconomic stability. The volatility of nondurable consumption and services should decline, but the volatility of durable purchases should counterfactually increase—due to easier
adjustment towards optimal stocks.
The contribution of lower equity requirements to macroeconomic stability arises in the
present model where debt has stable value. That is, there are no inflation shocks which
substantially change homeowners equity. This is important to note because low equity requirements also characterized the 1920s, and these arguably contributed to the following
Great Depression. In fact, as we discussed above in Section 2, the architects of the New Deal
regulatory system sought to stabilize the housing market by imposing equity requirements.
The key difference between the 1920s and the time since the 1990s is the monetary stability
of the latter period. This makes the present model a much better representation of recent
macroeconomic history than of the 1920s and 1930s.
The analysis in this paper abstracts from the implications of the financial reform for welfare. A comparison of steady states reveals nothing in this respect, because the intertemporal
substitution that benefits the borrower occurs along the transition path. In a companion paper (Campbell and Hercowitz, 2006), we calculate the transition path for this calibrated
economy. The model’s transition starts off with previously constrained households cashing out some of the home equity in excess of the new lower requirement. This borrowing
surge increases the interest rate. Over time, the debt stabilizes at a higher level while the
interest rate returns gradually to it’s steady state. The welfare analysis of the calibrated
economy indicates that both households gain in terms of discounted utility at the time of
the reform, although the saver’s gain is much larger than the borrower’s because the terms
of intertemporal trade move in her favor.
We conclude by noting that the interaction of borrowers and savers in the presence of
equity constraints might have interesting implications for the analysis of monetary and fiscal
22
transmission mechanisms. Lowering the interest rate in a model with standard intertemporal
substitution contracts labor supply by reducing the price of current leisure relative to future
leisure. In a monetary version of the present model, we expect a lower interest rate to expand
labor supply by increasing the demand for durable goods. This mechanism is relevant also for
fiscal policies involving temporary redistribution of resources. A temporary transfer of funds
from borrowers to savers should lower the interest rate—as the latter attempt to smooth
consumption—and hence it should be expansionary. For example, a tax cut for all agents
financed by government borrowing—which can be from savers only—should be contractionary
in the present setup because it generates a transfer in the opposite direction.
23
Appendices
A
Measurement of Collateralized Household Debt
This appendix provides the details behind the claim in Section 2 that homes and other
durable goods collateralize most household debt in the United States. From the 1962 Survey
of Financial Characteristics of Consumers, Projector and Weiss (1966), Table 14, report that
homes and real estate secured 77 percent of household debt, and automobiles another 8
percent. Using data from the 2001 Survey of Consumer Finances, Aizcorbe, Kennickell, and
Moore. (2003) report that borrowing collateralized by residential property accounted for 81.5
percent of households’ debt in 2001 (Table 10), and installment loans, which include both
collateralized vehicle loans and unbacked education and other loans, amount to an additional
12.3 percent. Credit card balances and other forms of debt account for the remainder. The
reported uses of borrowed funds (Table 12) indicate that vehicle debt represents 7.8 percent
of total household debt, and, hence, collateralized debt (by homes and vehicles) represents
almost 90 percent of total household debt in 2001.
B
Calibration of π and φ
This appendix presents the details underlying the calibrated values of π and φ for the two
equity-requirement regimes.
Our observations of automobile loan terms come from Federal Reserve Statistical release
G.19, which reports the average loan-to-value ratios and repayment periods for automobile
loans from 1971 onwards. Over the 1971-1982 sample, the average loan-to-value ratio is 0.87,
and the average term of a new car loan is 13.4 quarters. During the 1995:I-2004:II sample, the
average loan-to-value ratio for cars is 0.92, and the average term of car loans is 18 quarters.
For mortgage loans, the calibration is based on the Survey of Consumer Finances. The
SCF includes the year of home purchase, the equity stake in the home, and the original
maturity of the first two mortgages. Our basic measure of the initial equity share is the
average equity share of homeowners who purchased their homes within twelve months of the
interview date (for the 1983 SCF) or in the interview year (for the 1995 and 2001 SCF’s)
and who borrowed at least half of the home’s value. In the 1983 SCF, there are 104 such
homeowners. Their average equity share is 0.2275 with a standard error of 0.0137. In the
1995 and 2001 SCF’s, there are 334 and 251 comparable homeowners. Their average equity
24
shares are 0.1756 and 0.1749 with standard errors 0.0090 and 0.0094. For the same sample
in the 1983 SCF, average mortgage term and its standard error are 85.5 and 3.8 quarters.
For the 1995 and 2001 samples, the estimates are 102 and 108 quarters, with standard errors
of 2.1 and 2.0 quarters.
The fact that the initial equity shares and maturity observations from 1995 and 2001 are
very similar supports the assumption that by 1995 the reform of household credit markets
was largely complete. We use the average of the two years’ observations as our measures of
mortgage down-payment rates and terms for the period beginning in 1995.
Because the survey period for the 1983 SCF immediately followed the enactment of the
Garn-St. Germain Act, we think of these terms as representative of mortgage terms at the
end of the period of substantial financial regulation. To check whether they are typical also
prior to the financial reform, we examined the trends in average mortgage terms before 1983,
as reported in the Federal Home Loan Bank Board’s Monthly Interest Rate Survey. This
survey includes only single-family homes, and hence it is more restrictive than the SCF. From
1963, the first available observation, to 1982, this survey reports stable loan-to-value ratios.
The average loan-to-value ratio from 1963 to 1982 is 0.73 and this changed little over these
twenty years. This average implies an equity share approximately four percentage points
higher than we measure with the 1983 SCF. However, when we broaden the SCF sample
to include all borrowers (i.e., also those who borrowed less than half the home’s value), we
obtain an almost identical initial loan-to-value ratio of 0.72 with a standard error of 0.02.
Hence, the average initial equity share from the 1983 SCF of 0.2275 seems a good estimate
for the period before the reform.
In contrast to the stability of the loan-to-value ratio, the average repayment period increased from 85.2 quarters in 1963 to 102.4 in 1982. This increase indicates that the average
mortgage term in 1983 is higher than the typical term for the period of interest. Hence, we
adjust downwards the 85.5 quarters measure from the 1983 SCF by subtracting half of that
increase. The resulting loan term is 76.9 quarters.
We assemble these observations into calibrated values of π and φ for the two regimes.
For the first regime, we measure the repayment rates of mortgage and automobile debt with
the inverse of their average terms to maturity. Then, we calculate φ as the weighted average
of these repayment rates, where the weights are the average shares of mortgage debt and
consumer credit in total household debt over the period. From 1954 through 1982, these
shares are 0.7 and 0.3, so the calibrated value of φ for the high equity-requirement regime
is 0.0315. The financial reforms in the early 1980s substantially widened the options for
refinancing and the availability of home equity loans. Given these developments, a household
25
can practically extend the repayment period to the entire life of the home. Accordingly, we
assume that the repayment rate of home loans equals the rate of physical depreciation, 0.003.
Refinancing and second loans have never been prominent features of automobile finance, so
the terms of new car loans continue to reflect actual equity constraints. As before, we
measure the repayment rate of automobile loans with the inverse of their average maturity.
Averaging these with the shares of mortgage and consumer credit during the period 1995:I
through 2005:III (3/4 and 1/4) yields a value of φ of 0.0161 for the low equity-requirement
regime.
Similarly, π is a weighted average of the initial equity shares from automobile and mortgage debt. Ideally, the weights would reflect the flow of loans used to purchase new cars
and homes. Such observations are not available, so we construct the weights indirectly. In a
steady-state version of the model with two durable goods, loans extended in each category
should equal the principle repayment rate multiplied by the category’s steady-state debt.
Given the repayment rates and debt shares used to calibrate φ for the period before 1983:I,
the implied shares of home and automobile loans in total loans extended are 0.29 and 0.71.
The resulting value of π for the high equity-requirement regime is 0.16 (the weighted average
of 0.2275 for homes and 0.13 for cars). The average initial equity shares for both automobiles
and homes fall by 0.05 from the first to the second sample period. Hence, we set the value
of π for the low equity-requirement regime equal to 0.11.
26
References
Aizcorbe, A. M., A. B. Kennickell, and K. B. Moore. (2003). Recent changes in u.s. family
finances: Evidence from the 1998 and 2001 survey of consumer finances. Federal Reserve
Bulletin 89, 1–32.
Bernanke, B. and M. Gertler (1989). Agency costs, net worth, and business fluctuations.
American Economic Review 79 (1), 14–31.
Blanchard, O. and J. Simon (2001). The long and large decline in u.s. output volatility.
Brookings Papers on Economic Activity 2001 (1), 135–164.
Campbell, J. R. and J. D. M. Fisher (2004). Idiosyncratic risk and aggregate employment
dynamics. Review of Economic Dynamics 7 (2), 331–353.
Campbell, J. R. and Z. Hercowitz (2006). Welfare implications of the transition to high
household debt. Federal Reserve Bank of Chicago.
Del Boca, D. and A. Lusardi (2003). Credit market constraints and labor market decisions.
Labour Economics 10, 681–703.
Florida, R. L. (Ed.) (1986). Housing and the New Financial Markets. Rutgers, The State
University of New Jersey.
Fortin, N. M. (1995). Allocation inflexibilities, female labor supply, and housing assets
accumultion: Are women working to pay the mortgage? Journal of Labor Economics 13,
524–557.
Hansen, G. D. (1985). Indivisible labor and the business cycle. Journal of Monetary Economics 16, 309–327.
Hansen, G. D. and E. C. Prescott (2001). Capacity constraints, asymmetries, and the business
cycle. Manuscript.
Iacoviello, M. (2005). House prices, borrowing constraints and monetary policy in the business
cycle. American Economic Review 95 (3), 739–764.
Kahn, J., M. M. McConnell, and G. Perez-Quiros (2002). On the causes of the increased stability of the U.S. economy. Federal Reserve Bank of New York Economic Policy Review 8,
183–202.
27
King, R. G., C. I. Plosser, and S. T. Rebelo (1988). Production, growth and business cycles
I. Journal of Monetary Economics 21, 195–232.
King, R. G. and S. T. Rebelo (2000). Resuscitating real business cycles. In J. Taylor
and M. Woodford (Eds.), Handbook of Macroeconomics, Volume 1B, pp. 927–1007. North
Holland.
Kiyotaki, N. and J. Moore (1997). Credit cycles. Journal of Political Economy 105, 211–248.
Krusell, P. and A. A. Smith (1998, October). Income and wealth heterogeneity in the macroeconomy. Journal of Political Economy 106 (5), 867–896.
McConnell, M. M. and G. Perez-Quiros (2000). Output fluctuations in the United States:
What has changed since the early 1980’s. American Economic Review 90, 1464–1476.
Olney, M. L. (1991). Buy Now, Pay Later. Univeristy of North Carolina Press.
Projector, D. S. and G. S. Weiss (1966). Survey of financial characteristics of consumers.
Technical report, Federal Reserve Board of Governors.
Semer, M. P., J. H. Zimmerman, J. M. Frantz, and A. Ford (1986). Evolution of federal
legislative policy in housing: Housing credits. In R. L. Florida (Ed.), Housing and the New
Financial Markets. Rutgers-The State University of New Jersey.
Stock, J. H. and M. W. Watson (2002). Has the business cycle changed and why? In
M. Gertler and K. S. Rogoff (Eds.), NBER Macroeconomics Annual, pp. 159–218. MIT
Press.
Stock, J. H. and M. W. Watson (2003). Has the business cycle changed? Evidence and
explanations. In Monetary Policy and Uncertainty: Adapting to a Changing Economy.
Federal Reserve Bank of Kansas City.
28
Table 1: Percent Standard Deviations of HP-filtered U.S. Data(i)
Total Debt(iii)
Mortgage Debt(iii)
Hours Worked
Residential Investment
Nonresidential Investment
Durable Goods(iv)
Nondurable Goods & Services(iv,v)
Output
1954:I-1982:IV
2.77
2.32
1.97
11.99
5.12
5.66
1.14
1.88
Sample Period
1983:I-2005:III 1995:I-2005:III
1.88
0.59
1.76
0.81
1.52
1.29
5.20
2.59
4.79
5.00
3.07
2.03
0.64
0.65
1.11
0.99
Ratio(ii)
0.21
0.35
0.65
0.22
0.98
0.36
0.57
0.53
Notes: (i) All variables are logged and HP-filtered over the period 1954:I-2005:III. (ii) Ratio
of standard deviation for the period 1995:I-2005:III to that for the period 1954:I-1982:IV.
(iii) Nominal debt divided by the chain-weighted GDP deflator. (iv) Personal consumption
expenditures on the given category. (v) We chain subtracted housing services from personal
consumption expenditures on nondurable goods and services.
Table 2: Correlation Coefficients of HP-filtered Hours and Debt(i)
Total Debt & Hours Worked
Mortgage Debt & Hours Worked
1954:I-1982:IV
0.86
0.82
Sample Period
1983:I-2005:III
0.45
0.32
1995:I-2005:III
0.11
0.33
Note: (i) All variables are logged and HP-filtered over the period 1954:I-2005:III.
29
Table 3: Calibrated Parameter Values
Equity Requirements
High
Low
π
0.16
0.11
φ
0.0315
0.0161
α
0.3
η
σε
δ
0.95 0.0078 0.01
β̃
β̂
1
1.01
1
1.015
θ
ω
0.37 1.95
Table 4: The Model Economy’s Standard Deviations(i)
Debt
Hours Worked
Nondurable Consumption
Durable Purchases
Output
Baseline Economy
High(ii)
Low(ii)
Ratio
2.16
1.03
0.48
0.66
0.41
0.63
0.74
0.80
1.08
6.25
5.02
0.80
1.88
1.70
0.90
High-Substitution Economy
High(ii)
Low(ii)
Ratio
1.87
0.72
0.39
1.34
0.72
0.54
0.52
0.48
0.93
7.36
4.41
0.60
1.88
1.28
0.68
Notes: (i) The entries are population standard deviations of logged and HP-filtered observations. (ii) Equity requirement regime.
30
0.48
0.45
Household Debt / Tangible Household Assets
Mortgage Debt / Owner Occupied Real Estate
0.40
0.35
0.30
0.25
0.23
1954:I
1966:I
1975:I
1982:IV
1995:I
Figure 1: Ratios of Households’ Debts to their Tangible Assets
31
2005:III
0.07
Hours Worked
Real Debt
0.00
−0.08
1954:I
1966:I
1975:I
1982:IV
1995:I
Figure 2: HP Filtered Real Household Debt and Hours Worked(i)
Note: (i) Debts and Assets measured at current market values.
32
2005:III
Real Household Debt per Capita
1.15
0.00
−0.94
1954:I
1966:I
1975:I 1982:IV
1995:I
2005:III
1995:I
2005:III
Hours Worked per Capita
0.09
0.04
0.00
−0.04
−0.10
1954:I
1966:I
1975:I 1982:IV
Figure 3: Real Household Debt and Hours Worked
Notes: The panels plot the logarithms of per capita hours worked and nominal household
debt divided by the deflator for GDP. The average value of hours worked and the value in
1983 of real debt are normalized to zero. See the text for further details.
33
Hours Worked
End−of−Quarter Debt
1.60
0.53
0.78
0.00
0.00
Borrower’s Durable Consumption
Saver’s Durable Consumption
0.55
0.00
0.00
−0.52
Borrower’s Nondurable Consumption
Saver’s Nondurable Consumption
0.67
0.61
0.31
0.15
0.00
0
4
8
12
16
Quarters After Shock
20
0.00
0
4
8
12
16
Quarters After Shock
20
Figure 4: Household Responses with High Collateral Requirements to a Technology Shock
34
Hours Worked
Debt
1.60
0.53
0.36
0.78
0.42
0.00
0.00
Nondurable Consumption
Durable Consumption Expenditures
0.54
4.77
3.92
0.00
0.00
0
4
8
12
16
Quarters After Shock
Output
1.37
1.25
High Equity Requirements
Low Equity Requirements
0.00
0
4
8
12
16
Quarters After Shock
20
Figure 5: Aggregate Responses to a Technology Shock
35
20
Hours Worked
Debt
2.64
2.51
1.41
0.98
0.00
0.00
Nondurable Consumption
Durable Consumption Expenditures
14.45
0.72
8.62
0.00
0.00
0
4
8
12
16
Quarters After Shock
20
Output
3.64
2.41
High Equity Requirements
Low Equity Requirements
0.00
0
4
8
12
16
Quarters After Shock
20
Figure 6: Aggregate Responses to a Technology Shock in the High-Substitution Economy
36
Working Paper Series
A series of research studies on regional economic issues relating to the Seventh Federal
Reserve District, and on financial and economic topics.
Does Bank Concentration Lead to Concentration in Industrial Sectors?
Nicola Cetorelli
WP-01-01
On the Fiscal Implications of Twin Crises
Craig Burnside, Martin Eichenbaum and Sergio Rebelo
WP-01-02
Sub-Debt Yield Spreads as Bank Risk Measures
Douglas D. Evanoff and Larry D. Wall
WP-01-03
Productivity Growth in the 1990s: Technology, Utilization, or Adjustment?
Susanto Basu, John G. Fernald and Matthew D. Shapiro
WP-01-04
Do Regulators Search for the Quiet Life? The Relationship Between Regulators and
The Regulated in Banking
Richard J. Rosen
Learning-by-Doing, Scale Efficiencies, and Financial Performance at Internet-Only Banks
Robert DeYoung
The Role of Real Wages, Productivity, and Fiscal Policy in Germany’s
Great Depression 1928-37
Jonas D. M. Fisher and Andreas Hornstein
WP-01-05
WP-01-06
WP-01-07
Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy
Lawrence J. Christiano, Martin Eichenbaum and Charles L. Evans
WP-01-08
Outsourcing Business Service and the Scope of Local Markets
Yukako Ono
WP-01-09
The Effect of Market Size Structure on Competition: The Case of Small Business Lending
Allen N. Berger, Richard J. Rosen and Gregory F. Udell
WP-01-10
Deregulation, the Internet, and the Competitive Viability of Large Banks
and Community Banks
Robert DeYoung and William C. Hunter
WP-01-11
Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards
Christopher R. Knittel and Victor Stango
WP-01-12
Gaps and Triangles
Bernardino Adão, Isabel Correia and Pedro Teles
WP-01-13
A Real Explanation for Heterogeneous Investment Dynamics
Jonas D.M. Fisher
WP-01-14
Recovering Risk Aversion from Options
Robert R. Bliss and Nikolaos Panigirtzoglou
WP-01-15
Economic Determinants of the Nominal Treasury Yield Curve
Charles L. Evans and David Marshall
WP-01-16
1
Working Paper Series (continued)
Price Level Uniformity in a Random Matching Model with Perfectly Patient Traders
Edward J. Green and Ruilin Zhou
WP-01-17
Earnings Mobility in the US: A New Look at Intergenerational Inequality
Bhashkar Mazumder
The Effects of Health Insurance and Self-Insurance on Retirement Behavior
Eric French and John Bailey Jones
WP-01-18
The Effect of Part-Time Work on Wages: Evidence from the Social Security Rules
Daniel Aaronson and Eric French
WP-01-20
Antidumping Policy Under Imperfect Competition
Meredith A. Crowley
WP-01-21
WP-01-19
Is the United States an Optimum Currency Area?
An Empirical Analysis of Regional Business Cycles
Michael A. Kouparitsas
WP-01-22
A Note on the Estimation of Linear Regression Models with Heteroskedastic
Measurement Errors
Daniel G. Sullivan
WP-01-23
The Mis-Measurement of Permanent Earnings: New Evidence from Social
Security Earnings Data
Bhashkar Mazumder
WP-01-24
Pricing IPOs of Mutual Thrift Conversions: The Joint Effect of Regulation
and Market Discipline
Elijah Brewer III, Douglas D. Evanoff and Jacky So
WP-01-25
Opportunity Cost and Prudentiality: An Analysis of Collateral Decisions in
Bilateral and Multilateral Settings
Herbert L. Baer, Virginia G. France and James T. Moser
WP-01-26
Outsourcing Business Services and the Role of Central Administrative Offices
Yukako Ono
WP-02-01
Strategic Responses to Regulatory Threat in the Credit Card Market*
Victor Stango
WP-02-02
The Optimal Mix of Taxes on Money, Consumption and Income
Fiorella De Fiore and Pedro Teles
WP-02-03
Expectation Traps and Monetary Policy
Stefania Albanesi, V. V. Chari and Lawrence J. Christiano
WP-02-04
Monetary Policy in a Financial Crisis
Lawrence J. Christiano, Christopher Gust and Jorge Roldos
WP-02-05
Regulatory Incentives and Consolidation: The Case of Commercial Bank Mergers
and the Community Reinvestment Act
Raphael Bostic, Hamid Mehran, Anna Paulson and Marc Saidenberg
WP-02-06
2
Working Paper Series (continued)
Technological Progress and the Geographic Expansion of the Banking Industry
Allen N. Berger and Robert DeYoung
WP-02-07
Choosing the Right Parents: Changes in the Intergenerational Transmission
of Inequality Between 1980 and the Early 1990s
David I. Levine and Bhashkar Mazumder
WP-02-08
The Immediacy Implications of Exchange Organization
James T. Moser
WP-02-09
Maternal Employment and Overweight Children
Patricia M. Anderson, Kristin F. Butcher and Phillip B. Levine
WP-02-10
The Costs and Benefits of Moral Suasion: Evidence from the Rescue of
Long-Term Capital Management
Craig Furfine
WP-02-11
On the Cyclical Behavior of Employment, Unemployment and Labor Force Participation
Marcelo Veracierto
WP-02-12
Do Safeguard Tariffs and Antidumping Duties Open or Close Technology Gaps?
Meredith A. Crowley
WP-02-13
Technology Shocks Matter
Jonas D. M. Fisher
WP-02-14
Money as a Mechanism in a Bewley Economy
Edward J. Green and Ruilin Zhou
WP-02-15
Optimal Fiscal and Monetary Policy: Equivalence Results
Isabel Correia, Juan Pablo Nicolini and Pedro Teles
WP-02-16
Real Exchange Rate Fluctuations and the Dynamics of Retail Trade Industries
on the U.S.-Canada Border
Jeffrey R. Campbell and Beverly Lapham
WP-02-17
Bank Procyclicality, Credit Crunches, and Asymmetric Monetary Policy Effects:
A Unifying Model
Robert R. Bliss and George G. Kaufman
WP-02-18
Location of Headquarter Growth During the 90s
Thomas H. Klier
WP-02-19
The Value of Banking Relationships During a Financial Crisis:
Evidence from Failures of Japanese Banks
Elijah Brewer III, Hesna Genay, William Curt Hunter and George G. Kaufman
WP-02-20
On the Distribution and Dynamics of Health Costs
Eric French and John Bailey Jones
WP-02-21
The Effects of Progressive Taxation on Labor Supply when Hours and Wages are
Jointly Determined
Daniel Aaronson and Eric French
WP-02-22
3
Working Paper Series (continued)
Inter-industry Contagion and the Competitive Effects of Financial Distress Announcements:
Evidence from Commercial Banks and Life Insurance Companies
Elijah Brewer III and William E. Jackson III
WP-02-23
State-Contingent Bank Regulation With Unobserved Action and
Unobserved Characteristics
David A. Marshall and Edward Simpson Prescott
WP-02-24
Local Market Consolidation and Bank Productive Efficiency
Douglas D. Evanoff and Evren Örs
WP-02-25
Life-Cycle Dynamics in Industrial Sectors. The Role of Banking Market Structure
Nicola Cetorelli
WP-02-26
Private School Location and Neighborhood Characteristics
Lisa Barrow
WP-02-27
Teachers and Student Achievement in the Chicago Public High Schools
Daniel Aaronson, Lisa Barrow and William Sander
WP-02-28
The Crime of 1873: Back to the Scene
François R. Velde
WP-02-29
Trade Structure, Industrial Structure, and International Business Cycles
Marianne Baxter and Michael A. Kouparitsas
WP-02-30
Estimating the Returns to Community College Schooling for Displaced Workers
Louis Jacobson, Robert LaLonde and Daniel G. Sullivan
WP-02-31
A Proposal for Efficiently Resolving Out-of-the-Money Swap Positions
at Large Insolvent Banks
George G. Kaufman
WP-03-01
Depositor Liquidity and Loss-Sharing in Bank Failure Resolutions
George G. Kaufman
WP-03-02
Subordinated Debt and Prompt Corrective Regulatory Action
Douglas D. Evanoff and Larry D. Wall
WP-03-03
When is Inter-Transaction Time Informative?
Craig Furfine
WP-03-04
Tenure Choice with Location Selection: The Case of Hispanic Neighborhoods
in Chicago
Maude Toussaint-Comeau and Sherrie L.W. Rhine
WP-03-05
Distinguishing Limited Commitment from Moral Hazard in Models of
Growth with Inequality*
Anna L. Paulson and Robert Townsend
WP-03-06
Resolving Large Complex Financial Organizations
Robert R. Bliss
WP-03-07
4
Working Paper Series (continued)
The Case of the Missing Productivity Growth:
Or, Does information technology explain why productivity accelerated in the United States
but not the United Kingdom?
Susanto Basu, John G. Fernald, Nicholas Oulton and Sylaja Srinivasan
WP-03-08
Inside-Outside Money Competition
Ramon Marimon, Juan Pablo Nicolini and Pedro Teles
WP-03-09
The Importance of Check-Cashing Businesses to the Unbanked: Racial/Ethnic Differences
William H. Greene, Sherrie L.W. Rhine and Maude Toussaint-Comeau
WP-03-10
A Structural Empirical Model of Firm Growth, Learning, and Survival
Jaap H. Abbring and Jeffrey R. Campbell
WP-03-11
Market Size Matters
Jeffrey R. Campbell and Hugo A. Hopenhayn
WP-03-12
The Cost of Business Cycles under Endogenous Growth
Gadi Barlevy
WP-03-13
The Past, Present, and Probable Future for Community Banks
Robert DeYoung, William C. Hunter and Gregory F. Udell
WP-03-14
Measuring Productivity Growth in Asia: Do Market Imperfections Matter?
John Fernald and Brent Neiman
WP-03-15
Revised Estimates of Intergenerational Income Mobility in the United States
Bhashkar Mazumder
WP-03-16
Product Market Evidence on the Employment Effects of the Minimum Wage
Daniel Aaronson and Eric French
WP-03-17
Estimating Models of On-the-Job Search using Record Statistics
Gadi Barlevy
WP-03-18
Banking Market Conditions and Deposit Interest Rates
Richard J. Rosen
WP-03-19
Creating a National State Rainy Day Fund: A Modest Proposal to Improve Future
State Fiscal Performance
Richard Mattoon
WP-03-20
Managerial Incentive and Financial Contagion
Sujit Chakravorti, Anna Llyina and Subir Lall
WP-03-21
Women and the Phillips Curve: Do Women’s and Men’s Labor Market Outcomes
Differentially Affect Real Wage Growth and Inflation?
Katharine Anderson, Lisa Barrow and Kristin F. Butcher
WP-03-22
Evaluating the Calvo Model of Sticky Prices
Martin Eichenbaum and Jonas D.M. Fisher
WP-03-23
5
Working Paper Series (continued)
The Growing Importance of Family and Community: An Analysis of Changes in the
Sibling Correlation in Earnings
Bhashkar Mazumder and David I. Levine
WP-03-24
Should We Teach Old Dogs New Tricks? The Impact of Community College Retraining
on Older Displaced Workers
Louis Jacobson, Robert J. LaLonde and Daniel Sullivan
WP-03-25
Trade Deflection and Trade Depression
Chad P. Brown and Meredith A. Crowley
WP-03-26
China and Emerging Asia: Comrades or Competitors?
Alan G. Ahearne, John G. Fernald, Prakash Loungani and John W. Schindler
WP-03-27
International Business Cycles Under Fixed and Flexible Exchange Rate Regimes
Michael A. Kouparitsas
WP-03-28
Firing Costs and Business Cycle Fluctuations
Marcelo Veracierto
WP-03-29
Spatial Organization of Firms
Yukako Ono
WP-03-30
Government Equity and Money: John Law’s System in 1720 France
François R. Velde
WP-03-31
Deregulation and the Relationship Between Bank CEO
Compensation and Risk-Taking
Elijah Brewer III, William Curt Hunter and William E. Jackson III
WP-03-32
Compatibility and Pricing with Indirect Network Effects: Evidence from ATMs
Christopher R. Knittel and Victor Stango
WP-03-33
Self-Employment as an Alternative to Unemployment
Ellen R. Rissman
WP-03-34
Where the Headquarters are – Evidence from Large Public Companies 1990-2000
Tyler Diacon and Thomas H. Klier
WP-03-35
Standing Facilities and Interbank Borrowing: Evidence from the Federal Reserve’s
New Discount Window
Craig Furfine
WP-04-01
Netting, Financial Contracts, and Banks: The Economic Implications
William J. Bergman, Robert R. Bliss, Christian A. Johnson and George G. Kaufman
WP-04-02
Real Effects of Bank Competition
Nicola Cetorelli
WP-04-03
Finance as a Barrier To Entry: Bank Competition and Industry Structure in
Local U.S. Markets?
Nicola Cetorelli and Philip E. Strahan
WP-04-04
6
Working Paper Series (continued)
The Dynamics of Work and Debt
Jeffrey R. Campbell and Zvi Hercowitz
WP-04-05
Fiscal Policy in the Aftermath of 9/11
Jonas Fisher and Martin Eichenbaum
WP-04-06
Merger Momentum and Investor Sentiment: The Stock Market Reaction
To Merger Announcements
Richard J. Rosen
WP-04-07
Earnings Inequality and the Business Cycle
Gadi Barlevy and Daniel Tsiddon
WP-04-08
Platform Competition in Two-Sided Markets: The Case of Payment Networks
Sujit Chakravorti and Roberto Roson
WP-04-09
Nominal Debt as a Burden on Monetary Policy
Javier Díaz-Giménez, Giorgia Giovannetti, Ramon Marimon, and Pedro Teles
WP-04-10
On the Timing of Innovation in Stochastic Schumpeterian Growth Models
Gadi Barlevy
WP-04-11
Policy Externalities: How US Antidumping Affects Japanese Exports to the EU
Chad P. Bown and Meredith A. Crowley
WP-04-12
Sibling Similarities, Differences and Economic Inequality
Bhashkar Mazumder
WP-04-13
Determinants of Business Cycle Comovement: A Robust Analysis
Marianne Baxter and Michael A. Kouparitsas
WP-04-14
The Occupational Assimilation of Hispanics in the U.S.: Evidence from Panel Data
Maude Toussaint-Comeau
WP-04-15
Reading, Writing, and Raisinets1: Are School Finances Contributing to Children’s Obesity?
Patricia M. Anderson and Kristin F. Butcher
WP-04-16
Learning by Observing: Information Spillovers in the Execution and Valuation
of Commercial Bank M&As
Gayle DeLong and Robert DeYoung
WP-04-17
Prospects for Immigrant-Native Wealth Assimilation:
Evidence from Financial Market Participation
Una Okonkwo Osili and Anna Paulson
WP-04-18
Institutional Quality and Financial Market Development:
Evidence from International Migrants in the U.S.
Una Okonkwo Osili and Anna Paulson
WP-04-19
Are Technology Improvements Contractionary?
Susanto Basu, John Fernald and Miles Kimball
WP-04-20
7
Working Paper Series (continued)
The Minimum Wage and Restaurant Prices
Daniel Aaronson, Eric French and James MacDonald
WP-04-21
Betcha can’t acquire just one: merger programs and compensation
Richard J. Rosen
WP-04-22
Not Working: Demographic Changes, Policy Changes,
and the Distribution of Weeks (Not) Worked
Lisa Barrow and Kristin F. Butcher
WP-04-23
The Role of Collateralized Household Debt in Macroeconomic Stabilization
Jeffrey R. Campbell and Zvi Hercowitz
WP-04-24
8
@FedFRASER