Essays on Household Balance Sheets and Consumption.

Abstract

This dissertation seeks to understand the relationships between monetary policy, housing markets, and household consumption behavior. The three chapters establish a causal relationship between these variables using disaggregated data and discuss potential aggregate effects and policy implications. The study first develops an housing model with heterogeneous construction costs to analyze price and construction dynamics following a shock to interest rates. Land-constrained areas exhibit larger price and small construction responses relative to unconstrained areas where new homes can be built cheaply. Using an MSAlevel panel linked to land availability and zoning regulations data, these results are largely confirmed empirically. This result forms the basis for identifying the marginal propensity to consume out of housing. Following a shock to interest rates, homeowner consumption responses are compared between land constrained with house price gains to unconstrained areas with little price growth. Under the assumption that land availability and zoning regulations do not affect consumption responses directly, this identifies the marginal propensity to consume (MPC) out of housing. Results from two household panels linked to non-public geographic identifiers are presented. Identified responses show homeowners exhibit an MPC of 0.04-0.06 out of home equity with little response for renters. These MPCs fall over the life-cycle with MPCs as high as 0.08 for those under 40 and 0.04 for those at retirement. Furthermore, credit constrained households exhibit larger MPCs with negligible effects on those with high liquidity or low leverage. These results are indicative of a strong role for collateral effects rather than wealth effects in driving the consumption response to housing. The study also shows that these effects result in an quantitatively important “homeowner balance sheet channel” for monetary policy. Loose money causes higher demand for housing, raising house values in inelastic-supply cities. This loosens credit constraints for homeowners in those cities, stimulating consumption. This study is the first to empirically identify this channel.