The Consumption Response to Positive and Negative Income Changes

48 Pages Posted: 13 Feb 2017

See all articles by Philip Bunn

Philip Bunn

Bank of England

Jeanne Le Roux

Bank of England

Kate Reinold

Bank of England - Monetary Analysis

Paolo Surico

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

Date Written: February 6, 2017

Abstract

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

Bunn, Philip and Le Roux, Jeanne and Reinold, Kate and Surico, Paolo, The Consumption Response to Positive and Negative Income Changes (February 6, 2017). Bank of England Working Paper No. 645. Available at SSRN: https://ssrn.com/abstract=2916082 or http://dx.doi.org/10.2139/ssrn.2916082

Philip Bunn (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Jeanne Le Roux

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Kate Reinold

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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