Do House Prices Affect Consumption? A Re-assessment of the Wealth Hypothesis
AbstractThis paper undertakes a comparison exercise to disentangle what drives the opposite findings regarding the effect of house prices on consumption documented in two papers using the same data set for the UK. On the one hand, Campbell and Cocco (2007) find that old owners are the most benefited by a house price increase and young renters the least, confirming the so-called wealth hypothesis. On the other hand, Attanasio, Blow, Hamilton, and Leicester (2009) find that house prices have the same impact on consumption across age groups, consistent with the so-called common factor hypothesis. First, we confirm that the findings in both papers can be reproduced. Second, we rule out a number of potential reasons related to the basic data construction, and provide evidence that the functional form (i.e., an Euler equation of consumption vs. a reduced form life-cycle model) and not data aggregation considerations (household level data vs. synthetic cohort data) may be at the root of the conflicting results in the two papers. Our findings revive the debate of whether there is an effect of house prices on consumption.
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Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7576.
Length: 34 pages
Date of creation: Aug 2013
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Find related papers by JEL classification:
- D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-06 (All new papers)
- NEP-EUR-2013-09-06 (Microeconomic European Issues)
- NEP-URE-2013-09-06 (Urban & Real Estate Economics)
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