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Consumption responses to permanent and transitory shocks to house appreciation


  • Juan Contreras
  • Joseph B. Nichols


We estimate the marginal propensity to consume (MPC) out of permanent and transitory shocks to house price appreciation. We consider two different models under which those shocks may affect consumption. In the first one, housing is a risky asset. In the second one, housing has a role as a consumption and as an investment good. In both, changes in the rate of house price appreciation may affect nonhousing consumption. Shocks to appreciation rates may happen when increases in future house prices are expected to differ from the current ones because heterogeneity, market failures or errors in expectations. We test the implications of those models empirically using the PSID's imputed total consumption from food consumption and self-reported house values, and base our identification strategy on two sources of variation in the appreciation rate. The first source depends on the fact that home prices are far more cyclical in areas where the supply of housing is relatively inelastic. The second source is households' perceptions about which parts of shocks to appreciation rates are permanent or transitory. We model households' self-reported rate of appreciation as an AR(1) process and use both the Hodrick-Prescott and the Kalman filter to separate households' perceptions about permanent and transitory shocks to appreciation. Our results show that (1) consumption responses to house wealth shocks vary greatly by area and depend upon the area-specific levels of temporal persistence and variance of those shocks; (2) the overall MPC out of those shocks is 3.5%; (3) the MPC out of permanent shocks is between 3.4% and 9.1%; and (4) the MPC out of transitory shocks is between 0.5% and 3.3%.

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  • Juan Contreras & Joseph B. Nichols, 2010. "Consumption responses to permanent and transitory shocks to house appreciation," Finance and Economics Discussion Series 2010-32, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2010-32

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    References listed on IDEAS

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    Cited by:

    1. Luc Arrondel & Pierre Lamarche & Frédérique Savignac, 2014. "Consommation et patrimoine des ménages : au‑delà du débat macroéconomique…," Économie et Statistique, Programme National Persée, vol. 472(1), pages 21-48.
    2. Luc Aroondel & Frédérique Savignac & Kévin Tracol, 2014. "Wealth and Consumption: French Households in the Crisis," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 163-204, September.
    3. Christelis, Dimitris & Georgarakos, Dimitris & Jappelli, Tullio, 2015. "Wealth shocks, unemployment shocks and consumption in the wake of the Great Recession," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 21-41.
    4. Calomiris, Charles W. & Longhofer, Stanley D. & Miles, William, 2013. "The Housing Wealth Effect: The Crucial Roles of Demographics, Wealth Distribution and Wealth Shares," Critical Finance Review, now publishers, vol. 2(1), pages 049-099, July.
    5. Irina A. Telyukova & Makoto Nakajima, 2011. "Reverse Mortgage Loans: A Quantitative Analysis," 2011 Meeting Papers 387, Society for Economic Dynamics.
    6. Arrondel, L. & Savignac, F. & Tracol, K., 2011. "Wealth Effects on Consumption Plans: French Households in the Crisis," Working papers 344, Banque de France.

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    Housing - Prices ; Real property ; Consumption (Economics);

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