Marginal Propensities to Consume Before and After the Great Recession
61 Pages Posted: 18 Feb 2021 Last revised: 19 Apr 2021
Date Written: April 19, 2021
Using a quasi maximum likelihood approach for a semi-structural model, we find highly precise and distinct estimates of consumption responses to idiosyncratic income shocks for different groups of households. Homeowners stratified by liquid wealth exhibit the most dispersion in their marginal propensities to consume. Time-varying estimates support strong patterns of heterogeneity by homeownership status and balance sheet liquidity, with economically and statistically significant increases in the sensitivity of transitory consumption for homeowners, especially those with lower liquid wealth, following the collapse in house prices with the Great Recession. These findings support consumption theories that include housing as an illiquid asset.
Keywords: Marginal propensity to consume, Great Recession, household liquidity, housing wealth
JEL Classification: E21, C13, C33, D12, D14
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