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Keynes Fund


Project Summary

Prof. Hamish Low - Micro to Macro Understanding the Aggregate Implications of Individual Behaviour Under Uncertainty (JHOL).


Summary of work and results

The project ended up focusing on the implications of house price uncertainty and house price changes. A part of this was on the role of credit constraints in reducing lifetime wealth rather than just hindering consumption smoothing.

The abstract from the working paper that we produced is:

“Household borrowing and spending rise with house prices, particularly for leveraged households, but household spending is not consumption. We propose an alternative borrow-to-invest channel by which house price gains affect household spending on residential investment. We show that rational, leveraged households have an incentive to make additional residential investments when house prices rise. Our empirical application compares responses in different kinds of spending across more and less leveraged households. We find strong evidence of the borrow-to-invest channel in UK data. Credit constraints matter through reducing access to leveraged returns and so reducing lifetime resources, rather than through consumption smoothing.”


Impact and outputs

House Price Rises and Borrowing to Invest, Thomas F. Crossley, Peter Levell and Hamish Low.

Part of the time was also spent on modelling other shocks, such as health shocks, although this work is not in working paper form.

Presentations: NBER Summer Institute, Institute for Fiscal Studies, Bank of Italy, CEMFI, National Institute for Economic Research, Copenhagen. In addition, my coathors presented the work at CESifo Venice, the Work and Pensions Economic Group (run by DWP), Royal Economic Society, EUI, University of Southern California, Bundesbank, Chicago Federal Reserve Bank and the Financial Conduct Authority.


Any possible future plans

We are continuing work in this area. A clear application of what we are doing is to understand the effects on household finances of the COVID shock, which different households are able to smooth in different ways.