This preview shows page 1. Sign up to view the full content.
Unformatted text preview: nt economic developments.
opments. I shall argue that it is difficult to understand why either the significant
decline in house prices since 2006 or the substantial losses sustained by financial
firms should have so seriously affected aggregate employment and economic
activity except in the context of a model in which financial intermediaries play a
crucial role and in which their ability to fulfill that function can at some times be
Housing Prices and Aggregate Demand
While the severity of the recent financial crisis has been extensively discussed,
some have questioned whether it was really the primary cause of the Great Recession.
For example, Baker (2010) argues that a substantial reduction in aggregate demand
can be explained as a wealth effect on consumer expenditure, given the decline
in U.S. households’ housing wealth by several trillion dollars. In this analysis, “the
problem is not first and foremost a financial crisis.” But as Buiter (2010) points out,
there is no aggregate wealth effect of a decline in housing prices, since the household
hold sector in aggregate is both the owner of the housing stock and the consum...
View Full Document