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How Much Does Household Collateral Constrain Regional Risk Sharing?

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Author Info
Hanno Lustig
Stijn Van Nieuwerburgh

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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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Handle: RePEc:nbr:nberwo:10505

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E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Hanno Lustig, 2004. "Housing Collateral, Consumption Insurance and Risk Premia: an Empirical Perspective (joint with Stijn Van Nieuwerburgh), forthcoming Journal of Finance," UCLA Economics Online Papers 300, UCLA Department of Economics. [Downloadable!]
  2. Hanno Lustig & Stijn Van Nieuwerburgh, 2004. "A Theory of Housing Collateral, Consumption Insurance and Risk Premia," NBER Working Papers 10955, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Thomas Nitschka, 2008. "Idiosyncratic Consumption Risk and Predictability of the Carry Trade Premium: Euro Area Evidence," IEW - Working Papers iewwp387, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  4. Sydney C. Ludvigson, 2007. "Housing, credit and consumer expenditure: commentary," Proceedings, Federal Reserve Bank of Kansas City, pages 335-350. [Downloadable!]
  5. Andrew Benito & Haroon Mumtaz, . "Consumption excess sensitivity, liquidity constraints and the collateral role of housing," Bank of England working papers 306, Bank of England. [Downloadable!]
  6. Thomas Nitschka, 2008. "The Risk Premium on the Euro Area Market Portfolio: The Role of Real Estate," IEW - Working Papers iewwp385, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  7. Mathias Hoffmann & Iryna Shcherbakova, 2008. "Consumption risk sharing over the business cycle: the role of small firms' access to credit markets," IEW - Working Papers iewwp363, Institute for Empirical Research in Economics - IEW. [Downloadable!]
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  8. Mathias Hoffmann & Thomas Nitschka, 2008. "Securitization of Mortgage Debt, Asset Prices and International Risk Sharing," IEW - Working Papers iewwp376, Institute for Empirical Research in Economics - IEW. [Downloadable!]
    Other versions:
  9. Hanno Lustig, 2004. "Can Housing Collateral Explain Long-Run Swings in Asset Returns? (joint with Stijn Van Nieuwerburgh)," UCLA Economics Online Papers 322, UCLA Department of Economics. [Downloadable!]
  10. Davis, Morris & Heathcote, Jonathan, 2005. "The Price and Quantity of Residential Land in the United States," CEPR Discussion Papers 5333, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  11. George M. Korniotis & Alok Kumar, 2008. "Do behavioral biases adversely affect the macro-economy?," Finance and Economics Discussion Series 2008-49, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  12. John Y. Campbell & João F. Cocco, 2005. "How Do House Prices Affect Consumption? Evidence From Micro Data," NBER Working Papers 11534, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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