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Housing Wealth and Consumption

20 Pages Posted: 21 Aug 2011  

Matteo M. Iacoviello

Federal Reserve Board - Trade and Financial Studies

Date Written: August 16, 2011

Abstract

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.

Keywords: borrowing constraints, consumption, consumption function, household budget

JEL Classification: C2, E2, G1, R2

Suggested Citation

Iacoviello, Matteo M., Housing Wealth and Consumption (August 16, 2011). FRB International Finance Discussion Paper No. 1027. Available at SSRN: https://ssrn.com/abstract=1912953 or http://dx.doi.org/10.2139/ssrn.1912953

Matteo M. Iacoviello (Contact Author)

Federal Reserve Board - Trade and Financial Studies ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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