Did Marginal Propensities to Consume Change with the Housing Boom and Bust?

CAMA Working Paper 32/2023

69 Pages Posted: 29 Jul 2023

See all articles by Yunho Cho

Yunho Cho

Institute for Economic and Social Research, Jinan University

James Morley

University of Sydney - School of Economics

Aarti Singh

The University of Sydney - School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 2023

Abstract

We extend a widely-used semi-structural model to identify and estimate dynamic consumption elasticities with respect to transitory income shocks. Applying our model to household survey data, we find a structural break in marginal propensities to consume following the end of the housing market boom, with the average across households increasing significantly. Our results suggest important heterogeneity by different household balance sheet characteristics and that the increase in the average was driven by higher short-run consumption elasticities for homeowners with low liquid wealth. The change in consumption behavior appears to be related to tighter borrowing constraints 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

Cho, Yunho and Morley, James and Singh, Aarti, Did Marginal Propensities to Consume Change with the Housing Boom and Bust? (July 2023). CAMA Working Paper 32/2023, Available at SSRN: https://ssrn.com/abstract=4519348 or http://dx.doi.org/10.2139/ssrn.4519348

Yunho Cho

Institute for Economic and Social Research, Jinan University ( email )

Huang Pu Da Dao Xi 601, Tian He District
Guangzhou, Guangdong 510632
China

James Morley

University of Sydney - School of Economics ( email )

Rm 607 Social Sciences Building
The University of Sydney
Sydney, NSW 2006 2008
Australia

HOME PAGE: http://https://sites.google.com/site/jamescmorley/

Aarti Singh (Contact Author)

The University of Sydney - School of Economics ( email )

Rm 370 Merewether (H04)
The University of Sydney
Sydney, NSW 2006 2008
Australia

HOME PAGE: http://sydney.edu.au/arts/economics/staff/academic/aarti_singh.shtml

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