Housing Wealth and Consumption: The Role of Heterogeneous Credit Constraints

Boragan Aruoba, Ronel Elul and Sebnem Kalemli-Ozcan

No 17747, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We quantify the role of heterogeneity in households’ financial constraints in explaining the link between the large decline in aggregate consumption and the decline in house values between 2006 and 2009 using individual-level data. Constraints that are triggered by a decline in house values, and a small fraction of consumers facing particularly severe constraints prior to the decline in house values explain 76% of the aggregate response. Local general equilibrium feedback and a decline in bank credit to consumers make up the remaining 24%. We find no contribution of a pure wealth effect in explaining the consumption decline.

Keywords: Financial crisis; Mortgage; Individual-level data; General equilibrium; Bank health; Credit supply; Wealth effects (search for similar items in EconPapers)
JEL-codes: E21 E32 (search for similar items in EconPapers)
Date: 2022-12
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