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

Kilponen, Juha, Euler Consumption Equation with Non-Separable Preferences over Consumption and Leisure and Collateral Constraints (March 24, 2009). Bank of Finland Research Discussion Paper No. 9/2009, Available at SSRN: https://ssrn.com/abstract=1428814 or http://dx.doi.org/10.2139/ssrn.1428814

Juha Kilponen (Contact Author)

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2847 (Phone)
+358 10 831 2294 (Fax)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/kilponen_juha/

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