Housing Wealth and Consumption: The Role of Heterogeneous Credit Constraints

Boragan Aruoba, Ronel Elul and Kalemli-Özcan, Á¹¢ebnem

No 17747, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We quantify the role of heterogeneity in households’ financial constraints in ex- plaining the large decline in aggregate consumption between 2006 and 2009 using individual-level data. Financial constraints can explain 56% of the aggregate response of consumption to changes in house prices. Local general equilibrium feedback and de- cline in bank credit to consumers make up the remaining 44%. Our results show that a large part of the response that was attributed to wealth effects in the prior literature, can in fact be explained by heterogeneity in households’ financial constraints.

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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