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Consumption, Housing Wealth and Financial Crises

Published online by Cambridge University Press:  26 March 2020

Ray Barrell  and
Simon Kirby
Ray Barrell
Affiliation:
National Institute of Economic and Social Research
Simon Kirby
Affiliation:
National Institute of Economic and Social Research
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Extract

This note reviews recent Institute work on the factors that might affect the future evolution of consumption. Drawing on Barrell and Davis (2007), it discusses the evidence for the effects of housing wealth on consumption, and shows that there has been strong and well supported evidence for a link for some time. This evidence suggests that a fall in house prices will cause consumption growth to slow. The discussion also covers evidence from Barrell, Davis and Pomerantz (2006) on the effects of financial crises on consumption behaviour. They suggest that there are large and significant negative effects on consumption during banking crises that are over and above the effects on consumption of the crisis-induced changes in income and wealth. Much of this work is embedded in our structural model, NiGEM, and it is possible to estimate the effects of house price declines and financial crises on consumption and income using the model. The note also gives a set of ready reckoners for the impacts of house price declines on output and of a given associated fall in the level of housing wealth on the level of consumption.

Type
Articles
Information
National Institute Economic Review , Volume 205 , July 2008 , pp. 57 - 60
Copyright
Copyright © 2008 National Institute of Economic and Social Research

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Footnotes

∗

We would like to thank Sylvia Gottschalk, Tatiana Fic, Iana Liadze and Ali Orazgani for their comments. Errors remain ours.

References

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