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Housing Wealth and Consumption: The Role of Heterogeneous Credit Constraints

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  • Kalemli-Özcan, Sebnem
  • Aruoba, Boragan
  • Elul, Ronel

Abstract

We quantify the role of heterogeneity in households' financial constraints in explaining the large decline in consumption between 2006 and 2009. Using household-level data, we show that in addition to a direct effect of changes in house prices, there are sizable indirect effects from general equilibrium feedback and bank health. About 60% of the aggregate response of consumption to changes in house prices is explained by ex-ante and ex-post financial constraints, where only a specific set of households face binding ex-post financial constraints as a result of declining house prices. We find a negligible wealth effect once we account for the role of heterogonous financial constraints.

Suggested Citation

  • Kalemli-Özcan, Sebnem & Aruoba, Boragan & Elul, Ronel, 2022. "Housing Wealth and Consumption: The Role of Heterogeneous Credit Constraints," CEPR Discussion Papers 17747, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:17747
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    More about this item

    Keywords

    Financial crisis; Mortgage; Individual-level data; General equilibrium; Bank health; Credit supply;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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