Credit, Housing Collateral and Consumption: Evidence from the UK, Japan and the US

The contrasting consumption behaviour of UK, US and Japanese households is examined in this paper through the lens of modernised Ando-Modgliani style consumption functions. Income growth expectations are treated systematically and income uncertainty and credit channel features are incorporated. These models therefore capture important parts of the financial accelerator. The evidence is that, since 1980, credit availability for UK and US but not Japanese households has undergone large shifts. Moreover, there is UK and US evidence both for a shift in the average consumption to income ratio as down-payment constraints eased, and for a shift in the collateral role of housing wealth as home equity loans became more freely available. Point estimates suggest the housing collateral effect is larger in the US than the UK, while land prices in Japan still have a negative effect on consumer spending. Together with evidence for negative real interest rate effects in the UK and US and positive ones in Japan, this suggests important differences in the transmission of monetary and credit shocks.