House Prices and Consumer Spending

57 Pages Posted: 26 Oct 2015

See all articles by David Berger

David Berger

Northwestern University

Veronica Guerrieri

University of Chicago - Booth School of Business

Guido Lorenzoni

Northwestern University; National Bureau of Economic Research (NBER)

Joseph Vavra

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: October 2015

Abstract

Recent empirical work shows large consumption responses to house price movements. This is at odds with a prominent theoretical view which, using the logic of the permanent income hypothesis, argues that consumption responses should be small. We show that, in contrast to this view, workhorse models of consumption with incomplete markets calibrated to rich cross-sectional micro facts actually predict large consumption responses, in line with the data. To explain this result, we show that consumption responses to permanent house price shocks can be approximated by a simple and robust rule-of-thumb formula: the marginal propensity to consume out of temporary income times the value of housing. In our model, consumption responses depend on a number of factors such as the level and distribution of debt, the size and history of house price shocks, and the level of credit supply. Each of these effects is naturally explained with our simple formula.

Suggested Citation

Berger, David and Guerrieri, Veronica and Lorenzoni, Guido and Vavra, Joseph, House Prices and Consumer Spending (October 2015). NBER Working Paper No. w21667. Available at SSRN: https://ssrn.com/abstract=2679706

David Berger (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Veronica Guerrieri

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Guido Lorenzoni

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joseph Vavra

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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