How Much Does Household Collateral Constrain Regional Risk Sharing?
Hanno N. Lustig
UCLA - Anderson School of Management; National Bureau of Economic Research (NBER)
Stijn Van Nieuwerburgh
New York University Stern School of Business, Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)
August 25, 2009
NYU Working Paper No. FIN-04-009
The covariance of regional consumption varies cross-sectionally and over time. Household-level borrowing frictions can explain this aggregate phenomenon. Whenthe value of housing falls, loan collateral shrinks, borrowing (risk-sharing) declines,and the sensitivity of consumption to income increases. Using panel data from 23 US metropolitan areas, we find that in times and regions where collateral is scarce, consumption growth is about twice as sensitive to income growth. Our model aggregates heterogeneous, borrowing-constrained households into regions characterized by a common housing market. The resulting regional consumption patterns quantitatively match the data.
Number of Pages in PDF File: 52
Keywords: Regional risk sharing, housing collateralworking papers series
Date posted: November 3, 2008 ; Last revised: October 16, 2009
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