House Prices and Consumption: A New Instrumental Variables Approach

65 Pages Posted: 12 Dec 2018 Last revised: 25 Jun 2020

See all articles by James Graham

James Graham

New York University (NYU), Department of Economics

Christos Makridis

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: May 31, 2020

Abstract

While the elasticity of housing supply has served as a popular instrument for inferring the causal effect of housing price growth on economic outcomes, concerns about the exclusion restriction have emerged. We introduce a methodology for creating instruments using the pre-existing supply of housing structures of different characteristics changes in the price of these characteristics. Unlike other common strategies for inferring the effects of housing price shocks, our Bartik-like instrument is a strong predictor of housing price growth in both the cross-section and over time even after controlling for county and time fixed effects, as well as a wide array of local demographic, business cycle, and industry characteristics. Using longitudinal household data, our instrument produces an elasticity of consumption with respect to local housing price growth of 0.12, corresponding to a marginal propensity to consume out of housing wealth equal to 0.8-1.03 cents on the dollar. These effects are concentrated among the young and those likely to be facing tight borrowing constraints.

Keywords: Consumption; House Prices; Marginal Propensity to Consume; Instrumental Variables; Bartik Instrument

JEL Classification: E21; D12; C26; R30

Suggested Citation

Graham, James and Makridis, Christos, House Prices and Consumption: A New Instrumental Variables Approach (May 31, 2020). Available at SSRN: https://ssrn.com/abstract=3285263 or http://dx.doi.org/10.2139/ssrn.3285263

James Graham (Contact Author)

New York University (NYU), Department of Economics ( email )

New York, NY
United States

Christos Makridis

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
194
Abstract Views
1,168
rank
170,741
PlumX Metrics