In a model with housing collateral, the ratio of housing wealth to human wealth shifts the conditional distribution of consumption growth. In the model, a decrease in house prices reduces the collateral value of housing, increases household exposure to idiosyncratic risk, reduces the amount of income risk shared and increases the conditional market price of risk. Regional risk-sharing patterns for US metropolitan areas lend direct support to the housing collateral channel. In times with a high housing collateral ratio, consumption growth is more strongly correlated across regions. Time-variation in the degree of risk-sharing induced by house price changes sheds new light on the consumption correlation puzzle
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Paper provided by Society for Economic Dynamics in its series 2004 Meeting Papers with number
548.
Length: Date of creation: 2004 Date of revision: Handle: RePEc:red:sed004:548
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Find related papers by JEL classification: E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
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