Housing Prices and Consumer Spending: The Bank Balance Sheet Channel /

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Bibliographic Details
Author / Creator:Marques da Paixao, Nuno Miguel, author.
Ann Arbor : ProQuest Dissertations & Theses, 2017
Description:1 electronic resource (89 pages)
Format: E-Resource Dissertations
Local Note:School code: 0330
URL for this record:http://pi.lib.uchicago.edu/1001/cat/bib/11715129
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Other authors / contributors:University of Chicago. degree granting institution.
Notes:Advisors: Veronica Guerrieri Committee members: Erik Hurst; Harald Uhlig.
This item is not available from ProQuest Dissertations & Theses.
Dissertation Abstracts International, Volume: 78-12(E), Section: A.
Summary:I quantify the extent to which deterioration of bank balance sheets explains the large contraction in housing prices and consumption experienced by the U.S. during the last recession. I introduce a Banking Sector with balance sheet frictions into a model of long-term collateralized debt with risk of default. Credit supply is endogenously determined and depends on the capitalization of the entire banking sector. Mortgage spreads and endogenous down payments increase in periods when banks are poorly capitalized. I simulate an increase in the stock of housing and a negative income shock to match the decline in house prices between 2006-2009. The model generates changes in consumption, foreclosures and refinance rates similar to those observed in the U.S. between 2006 and 2009. Changes in financial intermediaries' cost of funding explain, respectively, 38, 22 and 29 percent of the changes in housing prices, foreclosures and consumption generated by the model. These results show that the endogenous response of banks' credit supply can partially explain how changes in housing prices affect consumption decisions. I use this framework to analyze the impact of debt forgiveness and banks' recapitalization to mitigate the drop in housing prices and consumption. I also present empirical evidence that the bank balance sheet mechanism implied by the model was operational during this period. In other words, I show that during the great recession, changes in the real estate prices impacted the balance sheet of the banks that reacted by contracting their mortgage credit supply.