How much does household collateral constrain regional risk sharing?

The covariance of regional consumption varies cross-sectionally and over time. Household-level borrowing frictions can explain this aggregate phenomenon. When the value of housing falls, loan collateral shrinks, borrowing (risk-sharing) declines, and the sensitivity of consumption to income increases. Using panel data from 23 US metropolitan areas, we find that in times and regions where collateral is scarce, consumption growth is about twice as sensitive to income growth. Our model aggregates heterogeneous, borrowing-constrained households into regions characterized by a common housing market. The resulting regional consumption patterns quantitatively match the data. ∗corresponding author: email:[email protected], Dept. of Economics, UCLA, Box 951477 Los Angeles, CA 90095-1477 †email: [email protected], Dept. of Finance, NYU, 44 West Fourth Street, Suite 9-120, New York, NY 10012. First version May 2002. The material in this paper circulated earlier as ”Housing Collateral and Risk Sharing Across US Regions.” (NBER Working Paper). The authors thank Thomas Sargent, David Backus, Dirk Krueger, Patrick Bajari, Timothey Cogley, Marco Del Negro, Robert Hall, Lars Peter Hansen, Christobal Huneuus, Matteo Iacoviello, Patrick Kehoe, Martin Lettau, Sydney Ludvigson, Sergei Morozov, Fabrizio Perri, Monika Piazzesi, Luigi Pistaferri, Martin Schneider, Laura Veldkamp, Pierre-Olivier Weill, and Noah Williams. We also benefited from comments from seminar participants at NYU Stern, Duke, Stanford GSB, University of Iowa, Université de Montreal, University of Wisconsin, UCSD, LBS, LSE, UCL, UNC, Federal Reserve Bank of Richmond, Yale, University of Minnesota, University of Maryland, Federal Reserve Bank of New York, BU, Wharton, University of Pittsburgh, Carnegie Mellon University GSIA, Kellogg, University of Texas at Austin, Federal Reserve Board of Governors, University of Gent, UCLA, University of Chicago, Stanford, the SED Meeting in New York, and the North American Meeting of the Econometric Society in Los Angeles. Special thanks to Gino Cateau for help with the Canadian data. Stijn Van Nieuwerburgh acknowledges financial support from the Stanford Institute for Economic Policy research and the Flanders Fund for Scientific Research.