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Home Equity Extraction and the Boom-Bust Cycle in Consumption and Residential Investment

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  • Xiaoqing Zhou

Abstract

The consumption boom-bust cycle in the 2000s coincided with large fluctuations in the volume of home equity borrowing. Contrary to conventional wisdom, I show that homeowners largely borrowed for residential investment and not consumption. I rationalize this empirical finding using a calibrated two-goods, multiple-assets, heterogeneous-agent life-cycle model with borrowing frictions. The model replicates key features of the household-level and aggregate data. The model offers an alternative explanation of the consumption boom-bust cycle. This cycle is caused by large fluctuations in the number of borrowers and hence in total home equity borrowing, even though the fraction of borrowed funds spent on consumption is small.

Suggested Citation

  • Xiaoqing Zhou, 2018. "Home Equity Extraction and the Boom-Bust Cycle in Consumption and Residential Investment," Staff Working Papers 18-6, Bank of Canada.
  • Handle: RePEc:bca:bocawp:18-6
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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2018/02/swp2018-6.pdf
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    References listed on IDEAS

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    1. Davis, Morris A. & Heathcote, Jonathan, 2007. "The price and quantity of residential land in the United States," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2595-2620, November.
    2. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Home Equity Extraction and the Boom-Bust Cycle in Consumption and Residential Investment
      by Christian Zimmermann in NEP-DGE blog on 2018-02-27 03:26:39

    More about this item

    Keywords

    Credit and credit aggregates; Economic models; Housing;

    JEL classification:

    • D1 - Microeconomics - - Household Behavior
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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