Euler Consumption Equation with Non-Separable Preferences over Consumption and Leisure and Collateral Constraints
36 Pages Posted: 7 Jul 2009
Date Written: March 24, 2009
Abstract
This paper derives and estimates an aggregate Euler consumption equation which allows one to compare the importance of collateral constraints and non-separability of consumption and leisure as alternative sources of excess sensitivity of consumption to current income. Estimation results suggest that during a severe financial distress both non-separability and collateral constraints are needed to capture excess sensitivity of consumption to current economic conditions. During more tranquil times, evidence on collateral effects is more limited and non-separability is sufficient to make the Euler consumption equation agree well with the data.
Keywords: housing, financial distress, excess sensitivity of consumption
JEL Classification: E21, E32, E44
Suggested Citation: Suggested Citation