Research Discussion Papers, Bank of Finland
Euler consumption equation with non-separable preferences over consumption and leisure and collateral constraints
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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