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EXCESS SENSITIVITY, LIQUIDITY CONSTRAINTS, AND THE COLLATERAL ROLE OF HOUSING

Published online by Cambridge University Press:  01 June 2009

Andrew Benito  and
Haroon Mumtaz
Andrew Benito*
Affiliation:
Bank of England and International Monetary Fund
Haroon Mumtaz
Affiliation:
Bank of England
*
Address correspondence to: Andrew Benito, Monetary Assessment and Strategy Division, Bank of England, Threadneedle Street, London EC2R 8AH, UK; e-mail: andrew.benito@bankofengland.co.uk.
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Abstract

We estimate consumption Euler equations using U.K. household-level data, employing a switching regression technique. We find excess sensitivity to income for one group of households but not for a second group. The likelihood of excess sensitivity is greater for the young, those without liquid assets, the degree-educated, ethnic minorities and those with negative home equity, consistent with liquidity constraints and buffer-stock saving. Housing capital gains affect the consumption plans of the excess sensitivity group of households, but not the other group. These results are consistent with a “collateral channel” for housing. Around 20%–40% of U.K. households display excess sensitivity.

Keywords

Consumption-SmoothingSwitching RegressionCollateral

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Type
Articles
Information
Macroeconomic Dynamics , Volume 13 , Issue 3 , June 2009 , pp. 305 - 326
Copyright
Copyright © Cambridge University Press 2009

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