Home Equity, Household Savings and Consumption
Posted: 23 Oct 2007
The home-owning family's equity is a piggybank that can be broken open by borrowing. Each borrowing increases liabilities and cash equally, initially leaving net wealth unchanged. When those funds are spent and cash balances fall, consumption increases even as net wealth can decline. In a dynamic optimization, the marginal propensity to consume from net wealth is not always positive and can be positively correlated with housing debt.
Keywords: wealth, marginal propensity to consume, consumption, housing, home equity, piggybank
Suggested Citation: Suggested Citation