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How Much Does Household Collateral Constrain Regional Risk Sharing?

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  • Hanno Lustig
  • Stijn Van Nieuwerburgh

Abstract

We construct a new data set of consumption and income data for the largest US metropolitan areas, and we show that the covariance of regional consumption and income growth varies over time and in the cross-section. In times and regions where collateral is scarce, regional consumption growth is about twice as sensitive to income growth. Household-level borrowing frictions can explain this new stylized fact. When the value of housing relative to human wealth falls, loan collateral shrinks, borrowing (risk-sharing) declines, and the sensitivity of consumption to income increases. Our model aggregates heterogeneous, borrowing-constrained households into regions characterized by a common housing market. The resulting regional consumption patterns quantitatively match those in the data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10505.

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Date of creation: May 2004
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Publication status: published as Hanno Lustig & Stijn Van Nieuwerburgh. "How Much Does Household Collateral Constrain Regional Risk Sharing?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 265-294, April 2010. "How Much Does Household Collateral Constrain Regional Risk Sharing?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
Handle: RePEc:nbr:nberwo:10505

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