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

  • Matteo Iacoviello

    ()

    (Boston College)

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.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 589.

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Date of creation: 23 Jan 2004
Date of revision: 13 Sep 2004
Handle: RePEc:boc:bocoec:589
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