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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: https://www.bankofcanada.ca/wp-content/uploads/2018/02/swp2018-6.pdf
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    References listed on IDEAS

    as
    1. Marco Di Maggio & Amir Kermani & Christopher Palmer, 2016. "How Quantitative Easing Works: Evidence on the Refinancing Channel," NBER Working Papers 22638, National Bureau of Economic Research, Inc.
    2. Aditya Aladangady, 2014. "Homeowner Balance Sheets and Monetary Policy," Finance and Economics Discussion Series 2014-98, Board of Governors of the Federal Reserve System (U.S.), revised 21 Oct 2014.
    3. Arlene Wong, 2016. "Population aging and the transmission of monetary policy to consumption," 2016 Meeting Papers 716, Society for Economic Dynamics.
    4. 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.
    5. Martin Beraja & Andreas Fuster & Erik Hurst & Joseph Vavra, 2017. "Regional Heterogeneity and Monetary Policy," NBER Working Papers 23270, National Bureau of Economic Research, Inc.
    6. Neil Bhutta & Benjamin J. Keys, 2016. "Interest Rates and Equity Extraction during the Housing Boom," American Economic Review, American Economic Association, vol. 106(7), pages 1742-1774, July.
    7. Fang Yang, 2009. "Consumption over the Life Cycle: How Different is Housing?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 423-443, July.
    8. 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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    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

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    Cited by:

    1. John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian & William L. Skimmyhorn, 2019. "Borrowing to Save? The Impact of Automatic Enrollment on Debt," NBER Working Papers 25876, National Bureau of Economic Research, Inc.

    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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