Did marginal propensities to consume change with the housing boom and bust?
64 Pages Posted: 18 Feb 2021 Last revised: 31 Dec 2022
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Did marginal propensities to consume change with the housing boom and bust?
Did Marginal Propensities to Consume Change with the Housing Boom and Bust?
Date Written: December 28, 2022
Abstract
To improve estimates of household consumption behavior, we extend a widely-used semistructural
model by allowing for dynamic consumption elasticities with respect to transitory income shocks. Applying our model to biennial household survey data, we find a significant structural break in marginal propensities to consume from before to after the housing market boom and bust just prior to the Great Recession, with the average level for all households estimated to have increased by more than 40%. There is important heterogeneity across households grouped by different balance sheet characteristics and our results suggest the increase for all households was driven by higher short-run consumption elasticities for homeowners with low liquid wealth. The change appears to be related to tighter borrowing constraints for homeowners more than a shift in wealth distributions.
Keywords: Marginal propensity to consume; Great Recession; consumption insurance; liquid wealth; house prices
JEL Classification: E21, C13, C33, D12, D14
Suggested Citation: Suggested Citation