The Center for Growth and Opportunity’s Visiting Senior Fellow / Acting Director of Academic Outreach Aaron Hedlund recently published a research paper with the American Economic Association in the American Economic Journal: Macroeconomics.
Hedlund’s paper, Failure to Launch: Housing, Debt Overhang, and the Inflation Option, first released by the ADEMU, examines the wisdom of outside-the-box policy intervention and weighs the costs and benefits of temporary inflation.
Abstract from the paper’s American Economic Journal: Macroeconomics publishing:
Can inflating away nominal mortgage liabilities effectively combat recessions? I address this question using a model of illiquid housing, endogenous credit supply, and equilibrium default. I show that, in an ordinary recession, temporarily raising the inflation target has only modest or even counterproductive effects. However, during episodes like the Great Recession, inflation effectively boosts house prices, consumption, and dramatically cuts foreclosures, but only when fixed-rate mortgages are the dominant instrument. The quantitative implications of inflation also vary if other nominal rigidities or demand externalities are present. In the cross section, inflation delivers especially large gains to highly leveraged homeowners.