Hostname: page-component-586b7cd67f-rcrh6 Total loading time: 0 Render date: 2024-12-06T01:50:27.738Z Has data issue: false hasContentIssue false

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

Published online by Cambridge University Press:  01 June 2009

Andrew Benito*
Affiliation:
Bank of England and International Monetary Fund
Haroon Mumtaz
Affiliation:
Bank of England
*
Address correspondence to: Andrew Benito, Monetary Assessment and Strategy Division, Bank of England, Threadneedle Street, London EC2R 8AH, UK; e-mail: andrew.benito@bankofengland.co.uk.

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.

Type
Articles
Copyright
Copyright © Cambridge University Press 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Altonji, J.G. and Siow, A. (1987) Testing the response of consumption to income changes with (noisy) panel data. Quarterly Journal of Economics 102, 293328.CrossRefGoogle Scholar
Aoki, K., Proudman, J., and Vlieghe, J. (2004) House prices, consumption, and monetary policy: A financial accelerator approach. Journal of Financial Intermediation 13, 414435.CrossRefGoogle Scholar
Attanasio, O. and Low, H. (2004), Estimating Euler equations. Review of Economic Dynamics 7, 406435.CrossRefGoogle Scholar
Attanasio, O. and Weber, G. (1993) Consumption growth, the interest rate and aggregation. Review of Economic Studies 60, 631649.CrossRefGoogle Scholar
Benito, A. (2006) Does job insecurity affect household consumption? Oxford Economic Papers 56, 157181.CrossRefGoogle Scholar
Benito, A. (Forthcoming) Who withdraws housing equity and why? Economica.Google Scholar
Benito, A. and Mumtaz, H. (2006) Consumption Excess Sensitivity, Liquidity Constraints and the Collateral Role of Housing. Bank of England Working Paper No. 306.CrossRefGoogle Scholar
Blundell, R., Pistaferri, L., and Preston, I. (2004) Imputing Consumption in the PSID Using Food Demand Estimates from the CEX. IFS Working Paper 04/27.Google Scholar
Blundell, R., Browning, M., and Meghir, C. (1994) Consumer demand and the life-cycle allocation of household expenditures. Review of Economic Studies 61, 5780.CrossRefGoogle Scholar
Campbell, J.Y. and Cocco, J.F. (2007) How do house prices affect consumption? Evidence from micro data. Journal of Monetary Economics 54, 591621.CrossRefGoogle Scholar
Campbell, J.Y. and Mankiw, N.G. (1989) Consumption, income and interest rates: Reinterpreting the time-series evidence. In Blanchard, O.J. and Fischer, S. (eds.), NBER Macroeconomics Annual, pp. 185–216.CrossRefGoogle Scholar
Carroll, C.D. (2001a) Death to the log-linearized consumption Euler equation! (and very poor health to the second-order approximation). Advances in Macroeconomics 1 (1), article 6.Google Scholar
Carroll, C.D. (2001b) A theory of the consumption function, with and without liquidity constraints. Journal of Economic Perspectives 15 (3), 2346.CrossRefGoogle Scholar
Carroll, C.D., Dynan, K.E., and Krane, S.D. (2003) Unemployment risk and precautionary wealth: Evidence from households' balance sheets. Review of Economics and Statistics 85, 586604.CrossRefGoogle Scholar
Carroll, C.D. and Kimball, M. (2005) Liquidity Constraints and Precautionary Saving. Mimeo, Johns Hopkins University.Google Scholar
Flavin, M. (1981) The adjustment of consumption to changing expectations about future income. Journal of Political Economy 89, 9741009.CrossRefGoogle Scholar
Garcia, R., Lusardi, A., and Ng, S. (1997) Excess sensitivity and asymmetries in consumption: An empirical investigation. Journal of Money, Credit and Banking 29, 154176.CrossRefGoogle Scholar
Hall, R.E. (1978) The stochastic implications of the life cycle-permanent income hypothesis. Journal of Political Economy 86, 971987.CrossRefGoogle Scholar
Hall, R.E. and Mishkin, F. (1982) The sensitivity of consumption to transitory income: Estimates from panel data on households. Econometrica 50, 461481.CrossRefGoogle Scholar
Hu, X. and Schiantarelli, F. (1998) Investment and capital market imperfections: A switching regression approach using US firm panel data. Review of Economics and Statistics 80, 466479.CrossRefGoogle Scholar
Hurst, E. and Stafford, F. (2004) Home is where the equity is: Mortgage refinancing and household consumption. Journal of Money, Credit and Banking 36, 9851014.CrossRefGoogle Scholar
Iacoviello, M. (2004) Consumption, house prices and collateral constraints: A structural econometric analysis. Journal of Housing Economics 13, 305321.CrossRefGoogle Scholar
Iacoviello, M. (2005) House prices, borrowing constraints and monetary policy in the business cycle. American Economic Review 95, 739764.CrossRefGoogle Scholar
Jappelli, T. (1990) Who is credit constrained in the US economy? Quarterly Journal of Economics 94, 219234.CrossRefGoogle Scholar
Jappelli, T., Pischke, J.-S., and Souleles, N.S. (1998) Testing for liquidity constraints in Euler equations with complementary data sources. Review of Economics and Statistics 251–262.CrossRefGoogle Scholar
King, M.A. (1990) Discussion. Economic Policy, 383–387.Google Scholar
Kiyotaki, N. and Moore, J. (1997) Credit cycles. Journal of Political Economy 105, 211248.CrossRefGoogle Scholar
Lee, L.-F. (1997) Simulation estimation of dynamic switching regression and dynamic disequilbrium models: Some Monte Carlo results. Journal of Econometrics 78, 179184.Google Scholar
Lopes, P. (2003) Credit Card Debt and Default over the Life-Cycle. Mimeo, London School of Economics.Google Scholar
Maddala, G.S. (1986) Limited Dependent and Qualitative Variables in Econometrics. Cambridge, UK: Cambridge University Press.Google Scholar
Meghir, C. and Weber, G. (1996) Intertemporal non-separability or borrowing restrictions? A disaggregated analysis using a US consumption panel. Econometrica 64, 11511181.CrossRefGoogle Scholar
Palumbo, M.G. (1999) Uncertain medical expenses and precautionary savings near the end of the life cycle. Review of Economic Studies 66, 395421.CrossRefGoogle Scholar
Parker, J. (1999) Spendthrift in America? On two decades of decline in the U.S. saving rate. In Bernanke, B. and Rotemberg, J. (eds.), NBER Macroeconomics Annual, pp. 317–370.CrossRefGoogle Scholar
Shea, J. (1995) Union contracts and the life cycle-permanent income hypothesis. American Economic Review 85, 186200.Google Scholar
Skinner, J. (1987) A superior measure of consumption from the Panel Study of Income Dynamics. Economics Letters 23, 213216.CrossRefGoogle Scholar
Tversky, A. and Kahneman, D. (1991) Loss aversion in riskless choice: A reference-dependent model. Quarterly Journal of Economics 106, 10391061.CrossRefGoogle Scholar
Zeldes, S. (1989) Consumption and liquidity constraints: An empirical investigation. Journal of Political Economy 97, 305346.CrossRefGoogle Scholar