Welfareimplicationsofthetransitiontohighhouseholddebt$

Aggressivederegulationofthemortgagemarketintheearly1980striggeredinnovations that greatlyreducedindebtedhouseholds’requiredhomeequity,andaborrowingsurge followed. Thispaperusesacalibratedgeneralequilibriummodeloflendingfromthe wealthytothemiddleclasstoevaluatethewelfareeffectsofthisreformquantitatively. Wefindthatthe‘‘indirect’’effectsofendogenousinterestrateandotherrelativeprice changes dominatethe‘‘direct’’effectofrelaxingtheconstraint.Theborrowing household’swelfarefallseventhoughthereformdirectlyrelaxesaconstraintonits trade. Thesavinghousehold’swelfarerisessubstantially