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

  • Iacoviello, Matteo

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 Society for Economic Dynamics in its series 2004 Meeting Papers with number 207b.

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Date of creation: 2004
Handle: RePEc:red:sed004:207b
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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