Public Debt and Household Lending

This paper studies the role of real estate wealth concentration for the macroeconomic impact of governments inducing banks to hold domestic sovereign debt. We build a model featuring housing, heterogeneous agents and banks optimizing their portfolio subject to financial frictions. A moral suasion shock, shifting banks’ assets from mortgages to bonds, lowers public borrowing costs while increasing private ones, crowding out household lending and increasing inequality. Real estate wealth concentration, affecting banks deposits, amplifies this effect. A hypothetical regulation limiting banks’ exposure to sovereign bonds reverses the adverse impact of moral suasion on private lending and inequality.

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