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.
