Residential housing, household portfolio, and intertemporal elasticity of substitution
Abstract
In this dissertation, I investigate whether the return on a household
portfolio and the inclusion of residential housing in a portfolio are important to
the household’s intertemporal consumption choice. In particular, my first essay
investigates whether the rate of interest such as the Treasury bill rate or the rate of
return such as the return on a household portfolio is more relevant to the
household’s intertemporal decision making. In the current era, households hold
portfolios of assets, which earn composite returns accounting for capital gains,
taxes, and inflation. In addition to stocks and bonds, I incorporate residential
housing into a household portfolio. The computed total composite return, a
weighted average return on the aggregate household portfolio, is then use
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estimating the intertemporal elasticity of substitution (IES), a parameter
measuring the response of household’s consumption growth to a change in a rate
of return. The estimates obtained using the real after-tax composite return with
aggregate consumption are about 0.15-0.3 and are more robust to linear and
nonlinear estimations, different consumption measures, and various time periods
than those obtained by using individual asset returns such as the Treasury bill rate.
My second essay is devoted to measuring and analyzing the return on
aggregate residential housing. This essay further investigates a major component
of the composite return that is not as straightforwardly computed as financial asset
returns. In constructing real after-tax total return on housing, I account for rental
income, capital gain, and subsidies due to the tax provisions for homeowners.
This is a more comprehensive measure of return than that found in the literature. I
find that residential housing provides high average return and low volatility, has
low correlation with other assets such as stocks and bonds, exhibits high positive
correlation with inflation, and should be a major part of the household portfolio.
Lastly, the third essay of the dissertation explores the impact of the
inclusion of housing in a household portfolio on the IES using household-level
data from the Consumer Expenditure Survey. Moreover, utilizing a household
level data set, I estimate IES parameters for different groups of assetholders. My
results indicate that housing return positively affects consumption growth, and
that housing is an important asset in the household portfolio.
Department
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