Did marginal propensities to consume change with the housing boom and bust?

64 Pages Posted: 18 Feb 2021 Last revised: 31 Dec 2022

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: 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

Cho, Yunho and Morley, James and Singh, Aarti, Did marginal propensities to consume change with the housing boom and bust? (December 28, 2022). Available at SSRN: https://ssrn.com/abstract=3780359 or http://dx.doi.org/10.2139/ssrn.3780359

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 (Contact Author)

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

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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