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Housing Wealth and Consumption: The Role of Heterogeneous Credit Constraints

Author

Listed:
  • S. Borağan Aruoba
  • Ronel Elul
  • Ṣebnem Kalemli-Özcan

Abstract

We quantify the role of heterogeneity in households’ financial constraints in explaining the large decline in aggregate consumption between 2006 and 2009 using individual-level data. Financial constraints can explain 56% of the aggregate response of consumption to changes in house prices. Local general equilibrium feedback and decline in bank credit to consumers make up the remaining 44%. Our results show that a large part of the response that was attributed to wealth effects in the prior literature, can in fact be explained by heterogeneity in households’ financial constraints.

Suggested Citation

  • S. Borağan Aruoba & Ronel Elul & Ṣebnem Kalemli-Özcan, 2022. "Housing Wealth and Consumption: The Role of Heterogeneous Credit Constraints," NBER Working Papers 30591, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:30591
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    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General

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