Consumption, Leisure and Borrowing Constraints
Juha Kilponen ()
The B.E. Journal of Macroeconomics, 2012, vol. 12, issue 1, 1-25
We derive and estimate an aggregate Euler consumption equation in which non-separability between consumption and leisure and borrowing constrained households makes current consumption dependent on labour and asset (house) prices. Estimation results suggest that when labour is included in the aggregate consumption equation it proves to be more important than house prices in explaining the wide fluctuations in Finnish consumption data. Moreover, the evidence of excess sensitivity of consumption to income virtually disappears as the consumption Euler equation accounts for predictable changes in labour in the Finnish data.
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