The Consumption Response to Positive and Negative Income Changes
48 Pages Posted: 13 Feb 2017
Date Written: February 6, 2017
A set of newly added questions in the 2011 to 2014 Bank of England/NMG Consulting Survey reveals that British households are estimated to change their consumption by significantly more in reaction to temporary and unanticipated falls in income than to rises of the same size. Household balance sheet characteristics (including the presence of a savings buffer), concerns about credit market access and higher subjective risk of lower future income account for a sizable share of this spending asymmetry and explain significant variation in the marginal propensity to consume across households. Our findings have important implications for predicting the response of aggregate consumption to expansionary and contractionary macroeconomic policies.
Keywords: MPC asymmetry, household balance sheet, heterogeneity, transmission mechanism
JEL Classification: E21, E52, D12
Suggested Citation: Suggested Citation