Housing Collateral and Household Indebtedness: Is there a Household Financial Accelerator? by

We examine the ‘financial accelerator’ model of household behaviour, whereby shocks to household balance sheets increase the amplitude of fluctuations in consumer spending by tightening or unbinding collateral constraints. We construct an alternative model where households have access to both secured and unsecured debt, and examine the consequences of shocks to household balance sheets (primarily, the value of housing wealth) in this augmented setting. We demonstrate that our alternative model considerably reduces the amplitude of fluctuations in debtfinanced consumer spending arising from fluctuations in household asset values. The paper tests the applicability of the two models using household panel data for the United Kingdom.