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Consumption, House Prices and Collateral Constraints: a Structural Econometric Analysis

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  • Matteo Iacoviello

    () (Boston College)

Abstract

If borrowing capacity of indebted households is tied to the value of their home, house prices should enter a correctly specified aggregate Euler equation for consumption. I develop a simple two-agent, dynamic general equilibrium model in which home (collateral) values affect debt capacity and consumption possibilities for a fraction of the households. I then derive and estimate an aggregate consumption Euler equation, and estimate its structural parameters. The results provide robust support for housing prices as a driving force of consumption fluctuations.

Suggested Citation

  • Matteo Iacoviello, 2004. "Consumption, House Prices and Collateral Constraints: a Structural Econometric Analysis," Boston College Working Papers in Economics 589, Boston College Department of Economics, revised 13 Sep 2004.
  • Handle: RePEc:boc:bocoec:589
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    References listed on IDEAS

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    Keywords

    consumption; credit; collateral constraints; house prices;

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • G1 - Financial Economics - - General Financial Markets
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis

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