Abstract: We examine how consumers adjust their spending in response to anticipated income changes and how these adjustments vary with the size of the income change. Using data from the Bank of Korea on credit card expenditure following an individual's final car loan payment —a predictable increase in discretionary income— we find an average marginal propensity to consume (MPC) of 18 percent. Our findings indicate a significant sensitivity of spending to the size of payments relative to quarterly income,  highlighting a notable deviation from consumption-smoothing behavior for smaller income changes. We also observe a strong size-dependent MPC regardless of liquidity constraints. These results have important implications for predicting consumption responses to fiscal policies. 

Abstract: We examine how the effects of government spending shocks depend on the balance-sheet position of households. Employing U.S. household survey data, we find a large, positive consumption response for households with mortgage debt, smaller response for renters, and an insignificant response for outright homeowners, in response to a positive government spending shock. We consider a model with three types of households and show that it can successfully account for these findings. Liquidity constraints and wealth effects play a crucial role in shock propagation. Our findings suggest the importance of household mortgage debt position in the transmission mechanism of fiscal policy.

Abstract (to be updated) 

Selected for: College of Liberat Arts (CLLA) Graduate  Summer Rearch Grant project;