Andrew Graczyk

Job market paper

Regressive Welfare Effects of Housing Bubbles

We analyze the welfare effects of asset bubbles in a model with income inequality and financial friction. We show that a bubble that emerges in the value of housing, a durable asset that is fundamentally useful, has regressive welfare effects on users of the asset. By raising the interest rate on debt, the bubble benefits high-income savers, but negatively affects low-income borrowers. The result is robust to different specifications of preferences and the credit constraint. The negative effect on borrowers is generally absent if the model only considers a standard pure bubble with no fundamental value.