Working Paper: NBER ID: w10505
Authors: Hanno Lustig; Stijn Van Nieuwerburgh
Abstract: We construct a new data set of consumption and income data for the largest US metropolitan areas, and we show that the covariance of regional consumption and income growth varies over time and in the cross-section. In times and regions where collateral is scarce, regional consumption growth is about twice as sensitive to income growth. Household-level borrowing frictions can explain this new stylized fact. When the value of housing relative to human wealth falls, loan collateral shrinks, borrowing (risk-sharing) declines, and the sensitivity of consumption to income increases. Our model aggregates heterogeneous, borrowing-constrained households into regions characterized by a common housing market. The resulting regional consumption patterns quantitatively match those in the data.
Keywords: household collateral; regional risk sharing; consumption; income growth
JEL Codes: E2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| household-level borrowing frictions (G51) | greater sensitivity of regional consumption growth to income shocks (F62) |
| collateral scarcity (D16) | diminished borrowing and risk-sharing capabilities (F65) |
| decreased collateral availability (F65) | heightened consumption sensitivity to income changes (D12) |
| collateral scarcity in the 95th percentile (D61) | 42% of income shocks being shared (D33) |
| collateral scarcity in the 5th percentile (D39) | 86% of income shocks being shared (D33) |
| lower collateral (G33) | larger change in consumption in response to income shocks (D11) |
| income elasticity of consumption growth doubles in regions with least collateral (F62) | income elasticity of consumption growth (F62) |