Boom-Bust Cycles in Housing and Credit Markets: The Role of Financial Innovation und Government Policy

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In this research project, we study boom-bust cycles in housing and credit markets that are driven by economic fundamentals andamplified by financial market imperfections. In particular, we ask to what extent government policy (tax policy) and financial innovation contribute to the occurrence of boom-bust cycles in economies with two financial market imperfections: limited contract enforcement and incomplete markets. To this end, we first develop a micro-founded macroeconomic model with heterogeneous households and these two financial frictions. We use a version of the model economy calibrated to the US data to simulate the quantitative impact of changes in government policy and financial innovation on the cyclical variations in house prices, household debt, default rates, and other macroeconomic variables. We also consider a second version of the model calibrated to German data and German institutions and conduct a comparative analysis between the US and Germany. Finally, we discuss the distributional consequences of changes ingovernment policy and financial innovation and their effect on longrun economic growth, with a special emphasis on the human capitalchannel.