Aron, Janine and Muellbauer, John and Murphy, Anthony (2006): Housing wealth, credit conditions and consumption.
Download (1MB) | Preview
There is widespread disagreement about the role of housing wealth in explaining consumption. Much of the empirical literature is marred by poor controls for the common drivers both of house prices and consumption, including income, income growth expectations, interest rates, credit supply conditions, other assets and indicators of income uncertainty (such as changes in the unemployment rate). For instance, while the easing of credit supply conditions is usually followed by a house price boom, failure to control for the direct effect of credit liberalization on consumption can over-estimate the effect of housing wealth or collateral on consumption. This paper suggests an empirical model grounded in theory with more complete controls than hitherto used. It is applied to modeling consumption in the UK and South Africa. Both countries experienced substantial credit market liberalization and rising consumption to income ratios. However, South Africa’s circumstances in the 1980s prevented an asset price boom, thus allowing the illumination of the direct role of credit liberalization. The paper incorporates methodological improvements in the measurement of credit conditions, and also clarifies the multi-faceted effects of credit liberalization on consumption.
|Item Type:||MPRA Paper|
|Original Title:||Housing wealth, credit conditions and consumption|
|Keywords:||Consumption, credit liberalization, housing wealth, housing collateral|
|Subjects:||E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth
|Depositing User:||Anthony Murphy|
|Date Deposited:||22. Aug 2010 01:25|
|Last Modified:||23. Feb 2015 09:25|
Aoki, K, Proudman, J. and Vlieghe, G. (2004), “House Prices, Consumption and Monetary Policy: a Financial Accelerator Approach”, Journal of Financial Intermediation, 13(4), 414-35.
Aoki, K., Proudman, J. and Vlieghe, G. (2006), “Houses as Collateral: Has the Link between House Prices and Consumption in the U.K. Changed?”, Federal Reserve Bank of New York Economic Policy Review (forthcoming).
Aron, J., Muellbauer, J. and Prinsloo, J. (2006a), “Estimating the Balance Sheet of the Personal Sector in an Emerging Market Country, South Africa 1970-2003”, chapter in Davies, J. and Shorrocks, T. (eds.), Personal Assets from a Global Perspective, Oxford University Press (forthcoming).
Aron, J., J. Muellbauer, J. and Prinsloob, J. (2006b), “A Note on Estimating Household Sector Wealth in South Africa”, Quarterly Bulletin, South African Reserve Bank forthcoming.
Aron, J. and Muellbauer, J. (2000a), “Personal and Corporate Saving in South Africa”, World Bank Economic Review, 14(3), 509-44.
Aron, J. and Muellbauer, J. (2000b), “Financial Liberalisation, Consumption and Debt in South Africa”, Centre for the Study of African Economies, working paper 2000.22.
Aron, J and Muellbauer, J. (2002a), “Interest Rate Effects on Output: Evidence from a GDP Forecasting Model for South Africa”, IMF Staff Papers, 49 (November, IMF Annual Research Conference), 185-213.
Aron, J. and Muellbauer, J. (2002b), “Estimating Monetary Policy Rules for South Africa”, in Loayza, N. and Schmidt-Hebbel, K. (eds), Monetary Policy: Rules and Transmission Mechanisms, Series on Central Banking, Analysis and Economic Policies, Volume 4, Central Bank of Chile, pages 427-75.
Aron, J and Muellbauer, J. (2005), “Monetary Policy, Macro-Stability and Growth: South Africa’s Recent Experience and Lessons”, World Economics, 6(4), 123-47.
Aron, J. and Muellbauer, J. (2006), “Estimates of Household Sector Wealth for South Africa, 1970-2003”, Review of Income and Wealth, forthcoming.
Attanasio, O., Blow, L., Hamilton, R. and Leicester, A. (2005), “Booms and Busts: Consumption, House Prices and Expectations”, Institute for Fiscal Studies working paper no. 05/24.
Bandiera, Oriana, Gerard Caprio, Patrick Honohan, and Fabio Schianterelli. 2000. “Does Financial Reform Raise or Reduce Private Savings?” Review of Economics and Statistics 82 (2): 239-263.
Banerjee, A., Dolado, J., Galbraith, J. and Hendry, D.F. (1993), Cointegration, Error Correction and the Econometric Analysis of Non-Stationary Data, Oxford: Oxford University Press.
Barrel, R. and Davis, E. P. (2004), “Consumption, Financial and Real Wealth in the G-5”, National Institute of Economics and Social Research, discussion paper no. 232.
Bayoumi, T. (1993a), “Financial Deregulation and Consumption in the United Kingdom”, Review of Economics and Statistics, 75(3), 536-39.
Bayoumi, T. (1993b), “Financial Deregulation and Household Saving”, Economic Journal, 103, 1432-43.
Benito, A., Thompson, J, Waldron, M. and Wood, R. (2006), “House Prices and Consumer Spending”, Bank of England Quarterly Bulletin, Summer, 142-54.
Boone, L. Girouard, N. and Wanner, I. (2001). “Financial Market Liberalisation, Wealth and Consumption”, OECD Economics Department working paper no. 308.
Bostic, R., Gabriel, S. and Painter, G. (2005), “Housing Wealth, Financial Wealth, and Consumption: New Evidence from Micro Data”, symposium paper, NUS-HKU, Singapore.
Bover, O. (2005), “Wealth Effects on Consumption: Micro-econometric Estimates from the Spanish Survey of Household Finances”, Bank of Spain working paper no. 0522.
Brodin, P. A. and Nymoen, R. (1992), “Wealth Effects and Exogeneity: the Norwegian Consumption Function 1966(1)-1989(4)”, Oxford Bulletin of Economics and Statistics 54 (3), 431-54.
Byrne, J. P. and Davis, P. E. (2003), “Disaggregate Wealth and Aggregate Consumption: an Investigation of Empirical Relationships for the G7”, Oxford Bulletin of Economics and Statistics, 65 (2), 197-220.
Cameron, G. and Muellbauer, J. (2000), “Earnings Biases in the United Kingdom Regional Accounts: Some Economic Policy and Research Implications”, Economic Journal, 110, F412-29.
Campbell, J. Y. and Cocco, J. F. (2005), “How Do House Prices Affect Consumption? Evidence From Micro Data”, NBER working paper no. 11534 and forthcoming Journal of Monetary Economics.
Campbell, J. Y. and Mankiw, N. G. (1989), “Consumption, Income and Interest Rates; Reinterpreting the Time Series Evidence” in Blanchard, O. J. and Fischer, S. (eds.), NBER Macroeconomics Annual 1989, Cambridge, Mass: MIT Press.
Campbell, J. Y. and Mankiw, N. G. (1991), “The Response of Consumption to Income: A Cross-Country Investigation”, European Economic Review, 35 (4), 723-56.
Carroll, C. D. (1997), “Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis”, Quarterly Journal of Economics, 112(1), 1-55.
Carroll, C. D. (2001a), “Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)”, Advances in Macroeconomics, Berkeley Electronic Press, 1(1).
Carroll, C. D. (2001b), “A Theory of the Consumption Function With and Without Liquidity Constraints”, Journal of Economic Perspectives, 15(3), 23-45.
Case, K. E., Quigley, J. M. and Shiller, R. J. (2005), “Comparing Wealth Effects: The Stock Market Versus the Housing Market”, Advances in Macroeconomics, Berkeley Electronic Press, 5(1), article 1.
Catte, P., Girouard, N., Price, R. and André, C. (2004), “Housing Markets, Wealth and the Business Cycle”, OECD Economics Department working paper no. 394.
Davidson, J., Hendry, D. F., Srba, F. and Yeo, S. (1978), “Econometric Modelling of the Aggregate Time-Series Relationship Between Consumers’ Expenditure and Income in the United Kingdom”, Economic Journal, 88(352), 661-92.
De Kock, G. (1978), Commission of Inquiry into the Monetary System and Monetary Policy in South Africa, Interim Report, Government Printer, Pretoria.
de Kock, G. (1985), Commission of Inquiry into the Monetary System and Monetary Policy in South Africa, Final Report, Government Printer, Pretoria.
Deaton, A. (1991), “Saving and Liquidity Constraints”, Econometrica, 59(5), 1221-48.
Deaton, A. (1992), Understanding Consumption, Oxford: Clarendon Press.
Deaton, A. (1999), “Saving and Growth”, in Schmidt-Hebbel, K. and Serven, L. (eds.), The Economics of Saving and Growth, Cambridge: Cambridge University Press.
Dickey, D. A. and Fuller, W. A. (1979), “Distribution of the Estimators for Autoregressive Time Series with a Unit Root”, Journal of the American Statistical Association, 74 (366), 427-31.
Dvornak, N. and Kohler, M. (2003), “Housing wealth, stock market wealth and consumption: a panel analysis for Australia”, Reserve Bank of Australia discussion paper no. RDP2003-07.
Engelhardt, G. V. (1996), “Consumption, Down Payments and Liquidity Constraints”, Journal of Money Credit and Banking, 28(2), 255-71.
Engle, R. and Granger, C. (1987), “Cointegration and Error Correction: Representation, Estimation and Testing”, Econometrica, 55(2), 251-76.
Fernandez-Corugedo, E. and Muellbauer, J. (2006), “Consumer Credit Conditions in the U.K.”, Bank of England working paper, forthcoming.
Friedman, M. (1957), A Theory of the Consumption Function, Princeton: Princeton University Press.
Friedman, M. (1963), “Windfalls, the ’Horizon’ and Related Concepts in the Permanent Income Hypothesis”, in Christ, C. et al. (eds.), Measurement in Economic, Stanford University Press.
GEAR (1996), Growth, Employment and Redistribution: A Macro-Economic Strategy, Ministry of Finance, South Africa.
Hall, R. E. (1978), “Stochastic Implications of the Life Cycle-permanent Income Hypothesis: Theory and Evidence”, Journal of Political Economy, 86(6), 971-87.
Hall, R. E. and Mishkin, F. S. (1982), “The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households”, Econometrica, 50(2), 461-81.
Hayashi, F. (1985), “The Permanent Income Hypothesis: Estimation and Testing by Instrumental Variables”, Journal of Political Economy. 90, 895-916.
Hendry, D. F. and Von Ungern-Sternberg, T. (1981), “Liquidity and Inflation Effects on Consumer’s Expenditure”, in Deaton, A. (ed.), Essays in Theory and Measurement of Consumers’ Behaviour, Cambridge: Cambridge University Press.
Hendry, D., Muellbauer, J. and Murphy, A. (1990). “The Econometrics of DHSY”, in Hey, J. and Winch, D. (eds.), A Century of Economics: 100 Years of the Royal Economic Society and the Economic Journal, Basil Blackwell, Oxford.
Honohan, P. (1999), “Financial Policies and Saving”, in Schmidt-Hebbel, K. and Serven, L. (eds.), The Economics of Saving and Growth, Cambridge: Cambridge University Press.
Iacoviello, M. (2004), “Consumption, House Prices and Collateral Constraints: a Structural Econometric Analysis”, Journal of Housing Economics, 13(4), 305-21.
Iacoviello, M. (2005), “House Prices, Borrowing Constraints and Monetary Policy in the Business Cycle”, American Economic Review, 95, 739-64.
Jappelli, T. and Pagano, M. (1994), “Saving, Growth and Liquidity Constraints”, Quarterly Journal of Economics, 109(1), 83-109.
Johansen, S. and Juselius, K. (1990), “Maximum Likelihood Estimation and Inference on Cointegration, with Applications to the Demand for Money”, Oxford Bulletin of Economics and Statistics, 52 (2), 169-210.
Katz Commission, (1996), Third Interim Report of the Commission of Inquiry into Certain Aspects of the Tax Structure of South Africa, Government Printer, Pretoria.
Kennedy, N. and Andersen, P. (1994), “Household Saving and Real House Prices: An International Perspective”, Bank for International Settlements working paper no. 21.
Lehnert, A. (2004), “Housing, Consumption and Credit Constraints”, Board of Governors of the Federal Reserve System, finance and economics discussion paper no. 2004-63.
Lettau, M. and Ludvigson, S. C. (2004), “Understanding Trend and Cycle in Asset Values: Re-evaluating the Wealth Effect on Consumption”, American Economic Review, 94(1), 276-99.
Ludwig, A. and Slok, T. (2002), “The Impact of Changes in Stock Prices and House Prices on Consumption in OECD Countries”, IMF working paper no. 02/1.
Lucas, R. E. (1976), “Econometric Policy Evaluation: a Critique”, Carnegie-Rochester Conference Series Supplement to the Journal of Monetary Economics, 1, 19-46.
Lustig, H. and Van Niewerburgh, S. (2005), “Housing Collateral, Consumption Insurance and Risk Premia: an Empirical Perspective”, Journal of Finance, 60(3) 1167-219.
MacKinnon, J. G. (1991), “Critical Values for Cointegration Tests”, in Engle, R. and Granger, C. (eds.), Long-run Economic Relationships: Readings in Cointegration, Oxford: Oxford University Press.
Maclennan, D., Muellbauer, J. and Stephens, M. (1998, 2000), “Asymmetries in Housing and Financial Market Institutions and EMU”, Oxford Review of Economic Policy, 14(3), 54-80. Revised version in Jenkinson, T. (ed), Readings in Macroeconomics, Oxford: Oxford University Press.
Miles, D. (1992), “Housing Markets, Consumption and Financial Liberalisation in the Major Economies”, European Economic Review, 1093-136.
Miles, D. (1994), Housing, Financial Markets, and the Wider Economy, New York: Wiley.
Mouton Report (1992), Report of the Committee of Investigation into a Retirement Provision System for South Africa, Government Printer, Pretoria.
Muellbauer, J. (1996), “Income Persistence and Macro-Policy Feedbacks in the US”, Oxford Bulletin of Economics and Statistics, 58, 703-33.
Muellbauer, J. (1988), “Habits, Rationality and Myopia in the Life-Cycle Consumption Function”, Annales d'Economie et de Statistique, 9, 47-70.
Muellbauer, J. and Murphy, A. (1993), “Income Expectations, Wealth and Demography in the Aggregate UK Consumption Function”, presented at HM Treasury Academic Panel 1993, Nuffield College ms.
Muellbauer, J. and Lattimore, R. (1995), “The Consumption Function: A Theoretical and Empirical Overview”, in Pesaran, H. and Wickens, M. (eds.), Handbook of Applied Econometrics, Oxford: Blackwell.
Muellbauer, J. and Murphy, A. (1995), “Explaining Regional Consumption”, presented at Bank of Portugal Conference on the Microeconomics of Saving, Lisbon 1995, Nuffield College, ms.
Patterson, K. D. (1984), “Net Liquid Assets and Net Illiquid Assets in the UK Consumption Function: Some Evidence for the UK”, Economic Letters, 14(4), 389-95.
Prinsloo, J. W. (2000), “The Saving Behaviour of the South African Economy”, South African Reserve Bank occasional paper no. 15.
Poterba, J. M. and Manchester, J. M. (1989), “Second Mortgages and Household Saving”, Regional Science and Urban Economics, 19 (2), 325-46.
Rajan, R. G. (2005), “Has Financial Development Made the World Riskier?”, online at: http://www.kc.frb.org/PUBLICAT/SYMPOS/2005/sym05prg.htm
Sarno, L. and Taylor, M. (1998), “Real Interest Rates, Liquidity Constraints and Financial Deregulation: Private Consumption Behaviour in the U.K.”, Journal of Macroeconomics, 20 (2), 221-42.
Schmidt-Hebbel, K. and Serven, L. (1999), The Economics of Saving and Growth. Cambridge: Cambridge University Press.
Schmidt-Hebbel, K. and Serven, L. (1997), “Saving across the World: Puzzles and Policies”, World Bank discussion paper no. 354.
Skinner, J. (1988), “Risky Income, Life-Cycle Consumption and Precautionary Savings”, Journal of Monetary Economics, 22, 237-55.
Zeldes, S. (1989), “Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence”, Quarterly Journal of Economics, 104(2). 275-98.
Zellner, A., Huang, D. S. and Chau, L. C. (1965), “Further Analysis of the Short-Run Consumption Function with Emphasis on the Role of Liquid Assets”, Econometrica, 33(3), 571-81.