Do House Prices Affect Consumption? A Comparison Exercise
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.� We rule out that changes in the sample period, the definition of consumption, the data source, the type of price deflator, and empirical considerations such as endogeneity bias and sampling noise in the construction of synthetic cohorts are the driving factors of the opposite conclusions reached by the two papers.� All our evidence points towards the empirical specification, i.e., whether it is a consumption function (an equation for the level of consumption) or an Euler equation (an equation for consumption growth) as the only plausible explanation to the conflicting results.� Our findings revive the debate of whether there is an effect of house prices on consumption, an issue of increasing importance in the current context of declining house prices in industrialized countries.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 589.
Date of creation: 01 Dec 2011
Date of revision:
Consumption; House prices; Wealth hypothesis; Common factor hypothesis;
Find related papers by JEL classification:
- D13 - Microeconomics - - Household Behavior - - - Household Production and Intrahouse Allocation
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Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- House prices and consumption: how model specification matters
by Economic Logician in Economic Logic on 2012-01-31 14:50:00
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