Scandinavian Working Papers in Economics
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Bank of Finland Research Discussion Papers, Bank of Finland

No 9/2009:
Euler consumption equation with non-separable preferences over consumption and leisure and collateral constraints

Juha Kilponen ()

Abstract: This paper derives and estimates an aggregate Euler consumption equation which allows one to compare the importance of collateral constraints and non-separability of consumption and leisure as alternative sources of excess sensitivity of consumption to current income. Estimation results suggest that during a severe financial distress both non-separability and collateral constraints are needed to capture excess sensitivity of consumption to current economic conditions. During more tranquil times, evidence on collateral effects is more limited and non-separability is sufficient to make the Euler consumption equation agree well with the data.

Keywords: housing; financial distress; excess sensitivity of consumption; (follow links to similar papers)

JEL-Codes: E21; E32; E44; (follow links to similar papers)

33 pages, March 24, 2009

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