Download or read book Essays on the Effect of Household Debt and Housing Wealth on the U.S. Economy written by Kyoungsoo Yoon and published by . This book was released on 2011 with total page 91 pages. Available in PDF, EPUB and Kindle. Book excerpt: Abstract: The two essays in my dissertation clarify the role of household debt and housing wealth in the U.S. economy because the effect of household debt and house prices on economic activity is conflicting based on existing empirical literature. In my first essay, Three Competing Effects of Expansion in Housing Finance on Consumption, I explicitly consider both debt service burden and wealth risk by adjusting income data with debt service and wealth data with its risk. Based on split-sample estimates of various consumption functions with different time horizons together with the data adjustment, I find that expansion in housing finance since the mid 1980s has three competing effects on consumption. First, housing finance expansion decreases the sensitivity of a household's consumption response to short-run and medium-run movements in income via a relaxed credit constraint. Second, an increase in the liquidity of housing wealth leads to a bigger response of consumption to changes in house prices. However, this increased housing wealth effect can be mitigated or magnified from the last competing effect of increased debt service, depending on the directions of movements in house prices and interest rates. Thus, the net effect of expanded housing finance on consumption depends on the relative magnitudes of the three competing effects in the face of movements in income, house prices, and interest rates. The second essay, The Role of Household Debt and Housing Wealth in the Recent Downturn of the U.S. Economy, uses state-level household debt and housing wealth data built from the Consumer Finance Monthly survey together with measures of economic activity at the state level during the business cycle of 2002-2009 in the U.S. to overcome limitations associated with national-level aggregate data. I find that increased household debt combined with large positive and negative fluctuations in housing wealth led to the recent severe downturn of the U.S. economy. While the increased debt service burden itself negatively affects consumption, households' attitudes toward debt surveyed as debt stress also seem to suppress economic activity such as consumption spending and residential investment.