FIN-02-051 |
NYU Stern School of Business |
The Financial Accelerator in Household Spending:
Evidence from International Housing Markets
November 2002
Heitor Almeida, Murillo Campello and Crocker Liu
ABSTRACT
This paper explores contractual features of housing Ūnance and uses data from international housing
markets to provide evidence supporting the ihŪnancial acceleratorll (Bernanke et al. 1996, 1999).
Among households whose housing demand is constrained by the availability of collateral, those who
can borrow against a larger fraction of the housing value (achieve higher loan-to-value, or LTV ratio)
have more procyclical debt capacity. This procyclicality in borrowing capacity is at the heart of the
mechanism underlying the Ūnancial accelerator. Our empirical strategy uses international variation
in maximum LTV ratios to show that housing prices as well as demand for new mortgages are more
sensitive to income shocks in countries with higher LTV ratios, consistent with the dynamics of
a collateral-based Ūnancial accelerator in household spending. We also Ūnd that the empirical
relationship between maximum LTV ratios and income sensitivities is stronger in countries where
housing prices are low relative to household income. Because collateral constraints are less likely to
bind when housing is more expensive (an income constraint may bind instead), these latter results
further suggest that a collateral-based accelerator is indeed behind the observed cross-country
dierences in income sensitivities.
Heitor Almeida
Institution: Leonard N. Stern School of Business at New York University
Phone: 212-998-0279
Fax: 212-995-4233
Email: halmeida@stern.nyu.edu
Homepage:http://pages.stern.nyu.edu/~halmeida
Murillo Campello
Institution: University of Illinois
Email: m-campe@uiuc.edu
Crocker Liu
Institution: Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012
Telephone: (212) 998-0353
Fax: (212) 995-4233
Email: cliu@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~cliu
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