Consumption Excess Sensitivity, Liquidity Constraints and the Collateral Role of Housing

36 Pages Posted: 28 Sep 2006

See all articles by Andrew Benito

Andrew Benito

Bank of England - Domestic Finance Division

Haroon Mumtaz

University of London - School of Sciences

Date Written: August 2006

Abstract

Using a switching regression technique we provide unique evidence on three questions concerning the consumption behaviour of UK households. First, what percentage of households display excess sensitivity to income? Second, what affects the likelihood of being in that group? Third, is there a collateral channel from house prices to consumption? We find 20%-40% of households display excess sensitivity. These households may be liquidity constrained or saving for other precautionary reasons. This is found to be more likely for those without liquid assets, with negative home equity, the young, unmarried, non-white and the degree-educated. According to the 'collateral channel', house prices influence consumption by allowing households that would otherwise be liquidity constrained to borrow on more attractive terms. A key implication of that view is that capital gains on housing should influence the consumption of the liquidity constrained/precautionary saving households, but not other households. We test that implication for the first time and find direct evidence in support.

Keywords: Collateral, liquidity constraint, precautionary saving

JEL Classification: D12, C35

Suggested Citation

Benito, Andrew and Mumtaz, Haroon, Consumption Excess Sensitivity, Liquidity Constraints and the Collateral Role of Housing (August 2006). Bank of England Working Paper No. 306. Available at SSRN: https://ssrn.com/abstract=933296 or http://dx.doi.org/10.2139/ssrn.933296

Andrew Benito (Contact Author)

Bank of England - Domestic Finance Division ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom
020 7601 5212 (Phone)

Haroon Mumtaz

University of London - School of Sciences ( email )

London, WC1E 7HX
United Kingdom

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