Household Debt, House Prices and Consumption in the United Kingdom: A Quantitative Theoretical Analysis

55 Pages Posted: 13 Mar 2010

See all articles by Matt Waldron

Matt Waldron

Bank of England

Fabrizio Zampolli

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: March 10, 2010

Abstract

Household debt and house prices in the United Kingdom rose substantially between 1987 and 2006. In this paper we use a calibrated overlapping generations model of the household sector to examine the extent to which changes in demographics, lower inflation, and a lower long-run real interest rate may explain the build-up of debt and the rise in house prices over that period. Our model suggests that lower real interest rates were particularly important. If households expected lower real interest rates to persist, then the model can more than explain the rise in debt and can explain most of the rise in house prices. However, the model leaves a puzzle because it predicts that an unanticipated fall in real interest rates should lead to a consumption boom that did not materialise in the data.

Keywords: Consumption, housing market, collateral constraints, life cycle, OLG

JEL Classification: E21, R31

Suggested Citation

Waldron, Matt and Zampolli, Fabrizio, Household Debt, House Prices and Consumption in the United Kingdom: A Quantitative Theoretical Analysis (March 10, 2010). Bank of England Working Paper No. 379, Available at SSRN: https://ssrn.com/abstract=1568770 or http://dx.doi.org/10.2139/ssrn.1568770

Matt Waldron (Contact Author)

Bank of England

Threadneedle Street
London, EC2R 8AH
United Kingdom

Fabrizio Zampolli

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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