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Euler consumption equation with non-separable preferences over consumption and leisure and collateral constraints

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  • Kilponen, Juha

Abstract

This paper derives and estimates an aggregate Euler consumption equation which allows one to compare the importance of collateral constraints and non-separability of consumption and leisure as alternative sources of excess sensitivity of consumption to current income. Estimation results suggest that during a severe financial distress both non-separability and collateral constraints are needed to capture excess sensitivity of consumption to current economic conditions. During more tranquil times, evidence on collateral effects is more limited and non-separability is sufficient to make the Euler consumption equation agree well with the data.

Suggested Citation

  • Kilponen, Juha, 2009. "Euler consumption equation with non-separable preferences over consumption and leisure and collateral constraints," Bank of Finland Research Discussion Papers 9/2009, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:rdp2009_009
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    More about this item

    Keywords

    housing; financial distress; excess sensitivity of consumption;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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