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Housing Wealth and Household Indebtedness: Is there a Household 'Financial Accelerator'?

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  • Richard Disney
  • Sarah Bridges
  • John Gathergood

Abstract

The 'financial accelerator' model when applied to households states that shocks to household balance sheets (primarily changes in house prices) amplify fluctuations in consumer spending by tightening or relaxing collateral constraints on borrowing. We construct an alternative model where households also have access to unsecured debt, and examine the effect of shocks to house prices on debt-financed consumption in this augmented setting. Our alternative model reduces the amplitude of fluctuations in debt-financed consumer spending arising from fluctuations in household asset values. The paper tests the applicability of the two models using panel data for the United Kingdom that allow us to measure collateral constraints, changes in asset values and financial indebtedness at the household level.

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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2006/12.

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Date of creation: Dec 2006
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Handle: RePEc:cnb:wpaper:2006/12

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Keywords: Collateral; consumer spending; Housing wealth; unsecured debt.;

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References

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  1. Jappelli, Tullio & Pagano, Marco, 1988. "Consumption and Capital Market Imperfection: An International Comparison," CEPR Discussion Papers 244, C.E.P.R. Discussion Papers.
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  3. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  4. Disney, Richard & Andrew Henley & David Jevons, 2002. "House Price Shocks, Negative Equity and Household Consumption in the UK in the 1990s," Royal Economic Society Annual Conference 2002 64, Royal Economic Society.
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Cited by:
  1. repec:ese:iserwp:2008-31 is not listed on IDEAS
  2. Helmut Rainer & Ian Smith, 2010. "Staying together for the sake of the home?: house price shocks and partnership dissolution in the UK," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 173(3), pages 557-574.
  3. Stolbov, M., 2012. "Financial Accelerator Theory and the Russian Mortgage Market," Journal of the New Economic Association, New Economic Association, vol. 13(1), pages 79-98.
  4. Hugo Benitez-Silva & Selcuk Eren & Frank Heiland & Sergi Jimenez-Martín, 2009. "How Well Do Individuals Predict the Selling Prices of Their Homes?," Economics Working Paper Archive wp_571, Levy Economics Institute.
  5. Muellbauer, John, 2008. "Housing, Credit and Consumer Expenditure," CEPR Discussion Papers 6782, C.E.P.R. Discussion Papers.
  6. R. Calcagno & E. Fornero & M. Rossi, 2009. "The Effect of House Prices on Household Consumption in Italy," The Journal of Real Estate Finance and Economics, Springer, vol. 39(3), pages 284-300, October.
  7. Pamela Lenton & Paul Mosley, 2008. "Debt and Health," Working Papers 2008004, The University of Sheffield, Department of Economics, revised Apr 2008.
  8. Atalay, Kadir & Whelan, Stephen & Yates, Judith, 2013. "Housing Wealth and Household Consumption: New Evidence from Australia and Canada," Working Papers 2013-04, University of Sydney, School of Economics.
  9. Philip Arestis & Ana Rosa Gonzalez, 2013. "Endogenous Bank Credit and Its Link to Housing in OECD Countries," Economics Working Paper Archive wp_750, Levy Economics Institute.

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