Housing Wealth and Consumption
Matteo M. Iacoviello
Federal Reserve Board - Trade and Financial Studies
August 16, 2011
FRB International Finance Discussion Paper No. 1027
Housing wealth is about one half of household net worth, and consumption is a considerable fraction (about two thirds) of Gross Domestic Product in the United States. Empirically, movements in housing wealth are associated with movements in consumption in the same direction. This observation has led many economists, commentators and policy makers to study how housing wealth and consumption are linked together. A sizable portion of the comovement between housing wealth and consumption reflects common factors driving both variables, rather than the "wealth effect" of the former on the latter; however, a growing body of evidence suggests that the comovement is larger in developed financial markets and in the presence of liquidity constraints.
Number of Pages in PDF File: 20
Keywords: borrowing constraints, consumption, consumption function, household budget
JEL Classification: C2, E2, G1, R2
Date posted: August 21, 2011
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