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  3. American Economic Journal: Macroeconomics
  4. January 2023
  5. House Prices and Consumption: A New Instrumental Variables Approach

House Prices and Consumption: A New Instrumental Variables Approach

  • James Graham
  • Christos A. Makridis
American Economic Journal: Macroeconomics
vol. 15, no. 1, January 2023
(pp. 411-43)
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Abstract

We introduce a novel Bartik-like instrument for house prices consisting of the local composition of housing characteristics interacted with aggregate changes in the marginal prices of these characteristics. Using household-level panel data, we estimate elasticities of nondurable consumption expenditures with respect to house prices of around 0.1. These consumption effects are concentrated among the young and those most likely to be facing tight borrowing constraints. A decomposition shows that identifying variation in the instrument is associated with times and locations where house prices have varied the most: during the housing bust of the mid-2000s and in the western United States.

Citation

Graham, James, and Christos A. Makridis. 2023. "House Prices and Consumption: A New Instrumental Variables Approach." American Economic Journal: Macroeconomics, 15 (1): 411-43. DOI: 10.1257/mac.20200246

Additional Materials

JEL Classification

  • D12 Consumer Economics: Empirical Analysis
  • E21 Macroeconomics: Consumption; Saving; Wealth
  • G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
  • R21 Urban, Rural, Regional, Real Estate, and Transportation Economics: Housing Demand
  • R31 Housing Supply and Markets
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