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Collateral Constraints and Macroeconomic Asymmetries

Author

Listed:
  • Luca Guerrieri

    (Federal Reserve Board)

  • Matteo Iacoviello

    (Federal Reserve Board)

Abstract
We show that a simple macroeconomic model with collateral constraints displays strong asymmetric responses to boom and bust periods. In a boom triggered by a rise in asset values, constraints become more and more relaxed, the collateral channel is weaker, and the response of aggregate consumption (and output) to a wealth shock is positive but small. In a recession, collateral constraints get tighter and tighter, the collateral channel gets stronger, and the response in consumption from a given change in asset values is negative and large. In experiments from an estimated model, we show how the elasticity of consumption to housing wealth can become nearly three times as large in a recession, even without accounting for the zero bound on interest rates. One implication from our model is that wealth effects computed in normal times might underestimate the true wealth effects which incorporate the response to large, negative wealth shocks such as those occurred during the Great Recession.

Suggested Citation

  • Luca Guerrieri & Matteo Iacoviello, 2012. "Collateral Constraints and Macroeconomic Asymmetries," 2012 Meeting Papers 1024, Society for Economic Dynamics.
    • Handle: RePEc:red:sed012:1024
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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