A simulation model of consumer spending and housing demand

Main points

• This paper adopts a micro-to-macro approach to examine the determination of aggregate personal sector behaviour, notably of consumer spending and housing demand. Previous analysis of the impact of borrowing constraints on the simple finite horizon life cycle model of individual consumption is extended to include consideration of housing demand financed by mortgage loans and of bequests. The implied aggregate behaviour of consumer spending and housing demand is derived by simulating an overlapping generations model. Attention is focussed on the effects of the relaxation of borrowing constraints, on intergenerational transfers of wealth and on the implications of real growth in house prices. The consequences for the aggregate saving ratio and wealth to income ratios are described.