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Abstract

If borrowing capacity of indebted households is tied to the value of their home, house prices should enter a correctly specified aggregate Euler equation for consumption. I develop a simple two-agent, dynamic general equilibrium model in which home (collateral) values affect debt capacity and consumption possibilities for a fraction of the households. I then derive and estimate an aggregate consumption Euler equation, and estimate its structural parameters. The results provide robust support for housing prices as a driving force of consumption fluctuations.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Housing Economics.

Volume (Year): 13 (2004)
Issue (Month): 4 (December)
Pages: 304-320

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Handle: RePEc:eee:jhouse:v:13:y:2004:i:4:p:304-320

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Web page: http://www.elsevier.com/locate/inca/622881

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Find related papers by JEL classification:

• C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
• E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
• G1 - Financial Economics - - General Financial Markets
• R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis

References

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