House Prices and Consumer Spending

David Berger, Veronica Guerrieri, Guido Lorenzoni () and Joseph Vavra

No 21667, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Recent empirical work shows large consumption responses to house price movements. This is at odds with a prominent theoretical view which, using the logic of the permanent income hypothesis, argues that consumption responses should be small. We show that, in contrast to this view, workhorse models of consumption with incomplete markets calibrated to rich cross-sectional micro facts actually predict large consumption responses, in line with the data. To explain this result, we show that consumption responses to permanent house price shocks can be approximated by a simple and robust rule-of-thumb formula: the marginal propensity to consume out of temporary income times the value of housing. In our model, consumption responses depend on a number of factors such as the level and distribution of debt, the size and history of house price shocks, and the level of credit supply. Each of these effects is naturally explained with our simple formula.

JEL-codes: D14 D91 E21 E32 E6 R21 (search for similar items in EconPapers)
Date: 2015-10
New Economics Papers: this item is included in nep-mac and nep-ure
Note: CF EFG LS ME PE
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Citations: View citations in EconPapers (46)

Published as David Berger, Veronica Guerrieri, Guido Lorenzoni, Joseph Vavra; House Prices and Consumer Spending, The Review of Economic Studies, , rdx060, https://doi.org/10.1093/restud/rdx060

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Journal Article: House Prices and Consumer Spending (2018)
Working Paper: House Prices and Consumer Spending (2015)
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