Working Paper: CEPR ID: DP7876
Authors: Janine Aron; John V. Duca; John Muellbauer; Keiko Murata; Anthony Murphy
Abstract: The consumption behaviour of UK, US and Japanese households is examined and compared using a modern Ando-Modigliani style consumption function. The models incorporate income growth expectations, income uncertainty, housing collateral and other credit effects. These models therefore capture important parts of the financial accelerator. The evidence is that credit availability for UK and US but not Japanese households has undergone large shifts since 1980. The average consumption-to-income ratio shifted up in the UK and US as mortgage down-payment constraints eased and as the collateral role of housing wealth was enhanced by financial innovations, such as home equity loans. The estimated housing collateral effect is roughly similar in the US and UK, while land prices in Japan still have a negative effect on consumer spending. Together with evidence for negative real interest rate effects in the UK and US and positive ones in Japan, this suggests important differences in the transmission of monetary and credit shocks between Japan and the US, UK and other credit-liberalized economies.
Keywords: consumption; credit conditions; housing collateral; housing wealth
JEL Codes: E21; E32; E44; E51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Credit Availability (G21) | Consumption-to-Income Ratio (E21) |
| Housing Wealth (G51) | Consumption (E21) |
| Rising Land Prices (R31) | Consumer Spending (D12) |
| Negative Real Interest Rates (E43) | Consumption (E21) |
| Positive Real Interest Rates (E43) | Consumption (E21) |
| Credit Market Liberalization and Housing Collateral (G59) | Consumption Functions (D11) |