EXCESS SENSITIVITY, LIQUIDITY CONSTRAINTS, AND THE COLLATERAL ROLE OF HOUSING

Andrew Benito () and Haroon Mumtaz

Macroeconomic Dynamics, 2009, vol. 13, issue 3, 305-326

Abstract: We estimate consumption Euler equations using U.K. household-level data, employing a switching regression technique. We find excess sensitivity to income for one group of households but not for a second group. The likelihood of excess sensitivity is greater for the young, those without liquid assets, the degree-educated, ethnic minorities and those with negative home equity, consistent with liquidity constraints and buffer-stock saving. Housing capital gains affect the consumption plans of the excess sensitivity group of households, but not the other group. These results are consistent with a “collateral channel” for housing. Around 20%–40% of U.K. households display excess sensitivity.

Date: 2009
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