Did Marginal Propensities to Consume Change with the Housing Boom and Bust?
CAMA Working Paper 32/2023
69 Pages Posted: 29 Jul 2023
There are 2 versions of this paper
Did marginal propensities to consume change with the housing boom and bust?
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
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