Economics Department

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TITLE:
Consumption, House Prices and Collateral Constraints: A Structural Econometric Analysis

AUTHOR(S):
Matteo Iacoviello, Boston College

DOCUMENT TYPE: Article

ABSTRACT:
If borrowing capacity of indebted households is tied to the value of their home, house prices should enter a correctly specified aggregate Euler equation for consumption. I develop a simple two-agent, dynamic general equilibrium model in which home (collateral) values affect debt capacity and consumption possibilities for a fraction of the households. I then derive and estimate an aggregate consumption Euler equation, and estimate its structural parameters. The results provide robust support for housing prices as a driving force of consumption fluctuations.