Housing, Debt and Growth

In this paper I study how debt and housing affect the trend of a closed economy. I build and estimate a DSGE model with endogenous growth and with heterogeneous agents, savers and borrowers. I find that in response to an increase in the nominal collateral value, savers decrease their investments in technology, thus reducing the productivity growth and the trend of the economy. The productivity growth is found to steadily increase during the Great Moderation, mainly explained by positive TFP shocks. In pre-crisis period, the housing boom and the debt overhang crowd out investments in technology, lowering the trend. In addition, the slow recovery which followed the Great Recession is mostly explained by a strong negative investment shock. Counterfactual exercises show that the presence of debt in the economy creates a propagation mechanism affecting the evolution of the trend and depending on the variation of the nominal collateral value. In particular, the effect of the investment shock is postponed with respect to the counter-factual scenario in which the net debt in the economy is zero