Household Debt and the Dynamic Effects of Income Tax Changes

61 Pages Posted: 5 Apr 2014

See all articles by James Cloyne

James Cloyne

University of California, Davis; Bank of England - Monetary Analysis

Paolo Surico

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: March 28, 2014

Abstract

Using a long span of expenditure survey data and a new narrative measure of exogenous income tax changes for the United Kingdom, we show that households with mortgage debt exhibit large and persistent consumption responses to changes in their income. Homeowners without a mortgage, in contrast, do not appear to react, with responses not statistically different from zero at all horizons. Splitting the sample by age and education yields more limited evidence of heterogeneity as the distributions of these demographics tend to overlap across housing tenure groups. We interpret our findings through the lens of traditional and more recent theories of liquidity constraints, providing a novel interpretation for the aggregate effects of tax changes on the economy.

Keywords: Mortgage debt, narrative tax changes, liquidity constraints

JEL Classification: E21, E62, H31

Suggested Citation

Cloyne, James and Surico, Paolo, Household Debt and the Dynamic Effects of Income Tax Changes (March 28, 2014). Bank of England Working Paper No. 491. Available at SSRN: https://ssrn.com/abstract=2420401 or http://dx.doi.org/10.2139/ssrn.2420401

James Cloyne (Contact Author)

University of California, Davis ( email )

One Shields Avenue
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Davis, CA 95616
United States

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

Paolo Surico

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

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