How Much Does Household Collateral Constrain Regional Risk Sharing?

Hanno Lustig and Stijn Van Nieuwerburgh
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Hanno Lustig: UCLA

Review of Economic Dynamics

Abstract: We construct a new data set of consumption and income data for the largest U.S. metropolitan areas, and we show that the extent of risk-sharing between regions varies substantially over time. In times when US housing collateral is scarce nationally, regional consumption is about twice as sensitive to income shocks. We also document higher sensitivity in regions with lower housing collateral. Household-level borrowing frictions can explain this new stylized fact. When the value of housing relative to human wealth falls, loan collateral shrinks, borrowing (risk-sharing) declines, and the sensitivity of consumption to income increases. Our model aggregates heterogeneous, borrowing-constrained households into regions characterized by a common housing market. The resulting regional consumption patterns quantitatively match those in the data. (Copyright: Elsevier)

Keywords: Regional risk sharing; Housing collateral (search for similar items in EconPapers)
JEL-codes: F41 E21 (search for similar items in EconPapers)
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http://dx.doi.org/10.1016/j.red.2009.09.005
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Working Paper: How Much Does Household Collateral Constrain Regional Risk Sharing? (2004)
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