We develop a model in which mortgage leverage available to households depends on the risk bearing capacity of financial intermediaries. Our model features a novel transmission mechanism from Wall Street to Main Street, as borrower households choose lower leverage and consumption when intermediaries are distressed. The model has financially constrained young and unconstrained middle-aged households in overlapping generations. Young households choose higher leverage and riskier mortgages than the middle-aged, and their consumption is particularly sensitive to credit supply. Relative to a standard model with exogenous credit constraints, the macroeconomic importance of intermediary net worth is magnified through its effects on household leverage, house prices, and consumption demand. The model quantitatively demonstrates how recessions with housing crises differ from those driven only by productivity, and how a growing demand for safe assets replicates many features of the 2000s credit boom and increases the severity of future financial crises.
William Diamond
- Assistant Professor of Finance
Contact Information
- Primary Email:
diamondw@wharton.upenn.edu - Office Phone:
(215) 898-3609
- office Address:
2320 Steinberg-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
Activity
Latest Research
Rebecca Diamond and William Diamond (2024), Affordability of Owner-Occupied Housing across US Cities, AEA Papers and Proceedings, 2024.
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Building Stronger Family Offices by Sharing Knowledge and Securing the FutureWharton management professor discusses the objectives and key takeaways of the Wharton Global Family Alliance’s 2024 Family Office Survey.…Read More
Knowledge @ Wharton - 2024/11/21Awards and Honors
Jacobs Levy Center Research Outstanding Paper Prize for "Risk-Free Interest Rates" (with Jules van Binsbergen and Marco Grotteria) 1970
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