Dr. Pedro Gete, IE Business School

Dr. Gete will present Mortgage Finance, Liquidity Traps

Abstract We quantify that the recourse mortgages dominant in the European housing systems can account for 38% of the post Great-Recession gap in per capita consumption between the USA and Europe. The result is mostly accounted for by general equilibrium effects through lower housing prices and weak demand for labor. We show that, even with foreclosures costs, in a liquidity trap mortgage regulations that allow for default are welfare dominant to regulations that discourage it. In terms of methodology, we show that models of liquidity traps with long-term debt, endogenous housing prices and default significantly amplify the impact and persistence of financial shocks.