How Much Does Household Collateral Constrain Regional Risk Sharing?
53 Pages Posted: 1 Jun 2004 Last revised: 16 Sep 2022
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How Much Does Household Collateral Constrain Regional Risk Sharing?
How Much Does Household Collateral Constrain Regional Risk Sharing?
How Much Does Household Collateral Constrain Regional Risk Sharing?
Date Written: May 2004
Abstract
We construct a new data set of consumption and income data for the largest US metropolitan areas, and we show that the covariance of regional consumption and income growth varies over time and in the cross-section. In times and regions where collateral is scarce, regional consumption growth is about twice as sensitive to income growth. Household-level borrowing frictions can explain this new stylized fact. When the value of housing relative to human wealth falls, loan collateral shrinks, borrowing (risk-sharing) declines, and the sensitivity of consumption to income increases. Our model aggregates heterogeneous, borrowing-constrained households into regions characterized by a common housing market. The resulting regional consumption patterns quantitatively match those in the data.
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