Working Paper: NBER ID: w30591
Authors: S. Boraan Aruoba; Ronel Elul; Ebnem Kalemlizcan
Abstract: We quantify the role of heterogeneity in households’ financial constraints in explaining the large decline in aggregate consumption between 2006 and 2009 using individual-level data. Financial constraints can explain 56% of the aggregate response of consumption to changes in house prices. Local general equilibrium feedback and decline in bank credit to consumers make up the remaining 44%. Our results show that a large part of the response that was attributed to wealth effects in the prior literature, can in fact be explained by heterogeneity in households’ financial constraints.
Keywords: No keywords provided
JEL Codes: E0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| House price changes (R31) | Consumption (E21) |
| House price changes (R31) | Financial constraints (D10) |
| Financial constraints (D10) | Consumption (E21) |
| Declines in house prices (R31) | Reduced consumption (E21) |
| House price changes (R31) | Bank health (G21) |
| Bank health (G21) | Credit supply to households and firms (E51) |