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Consumption and Savings of First Time House Owners: How Do They Deal with Adverse Income Shocks?

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Author Info

  • João Ejarque

    (University of Essex)

  • Søren Leth-Petersen

    (Department of Economics, University of Copenhagen)

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    Abstract

    We characterize savings behavior around the point of the first house purchase. Using a panel data set with income and wealth information on Danish first-time house owners we document that households save for the down payment, mortgage to the limit, run down liquid assets at purchase, and adjust to adverse income shocks occurring just after the purchase by reducing consumption. We build a model that replicates these observations, show that the preference parameters are identified from the data, and estimate them. Based on the estimated model house buying significantly reduces the ability to smooth adverse income shocks.

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    File URL: http://www.econ.ku.dk/cam/wp0910/wp0708/2008-08.pdf/
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    Bibliographic Info

    Paper provided by University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics in its series CAM Working Papers with number 2008-08.

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    Length: 23 pages
    Date of creation: Nov 2008
    Date of revision:
    Handle: RePEc:kud:kuieca:2008_08

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    Web page: http://www.econ.ku.dk/CAM/
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    1. James Banks & Richard Blundell & Zoe Oldfield & James P. Smith, 2010. "House Price Volatility and the Housing Ladder," Working Papers 786, RAND Corporation Publications Department.
    2. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers 7271, National Bureau of Economic Research, Inc.
    3. Ortalo-Magne, Francois & Rady, Sven, 2002. "Tenure choice and the riskiness of non-housing consumption," Journal of Housing Economics, Elsevier, vol. 11(3), pages 266-279, September.
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