The Role of Households’ Collateralized Debt in Macroeconomic Stabilization

This paper presents a macroeconomic model combining heterogeneity in time preference with the imposition of collateral constraints on households. The question analyzed is to what degree the financial reforms in the early 1980s, which lead to the relaxation of these constraints in the United States, can explain the subsequent decline in aggregate volatility. The model predicts a large fraction of the volatility decline in hours worked, output, household debt, and household durable goods purchases.