Abstract: Using newly constructed individual-level data based on the Bank of Korea (BOK) household debt database, we examine how consumers respond to anticipated income changes over time, and how their consumption responses vary depending on the magnitude of income changes. We find that the marginal propensity to consume (MPC) is 18 percent on average. The MPC monotonically decreases with the magnitude of anticipated income changes and the sensitivity of spending largely depends on the size relative to one's quarterly income. We also find a strong size effect regardless of liquidity constraints. When the predictable change in income is small, consumers tend to significantly deviate from consumption-smoothing behavior, implying a higher MPC. Theoretically, these empirical responses are justified by the welfare loss associated with the magnitude. The results have important implications for predicting consumption responses to government interventions.

Presented at: Society for Non linear Dynamics and Economics (SNDE) 29th Symposium (virtual); Computing in Economics and Finance (CEF) 28th International Conference  (Dallas, TX); Western Economic Association International (WEAI) 97th Annual Conference (virtual); Symposium on Econometric Theory and Applications (SETA) 16th International Symposium (virtual); KAEA Job Market Conference (virtual); Texas A&M Univeristy (College Station, TX); Midwest Macro Meeting (Dallas, TX; scheduled); Southern Economic Association (SEA) 92nd Annual Meeting (Fort Lauderdale, FL; scheduled); 

Abstract: This paper examines how the effects of government spending shocks depend on the balance-sheet position of households. Employing U.S. household survey data, we find that in response to a positive government spending shock, households with mortgage debt have a large, positive consumption response, while renters have a smaller rise in consumption. Homeowners without mortgage debt, in contrast, have an insignificant expenditure response. We consider a dynamic stochastic general equilibrium (DSGE) model with three types of households: savers who own their housing, borrowers with mortgage debt, and rule-of-thumb consumers who rent housing, and show that it can successfully account for these findings. The model suggests that liquidity constraints and wealth effects, tied to the persistence of public spending, play a crucial role in the propagation of government spending shocks. Our findings provide both empirical and theoretical support for the notion that household mortgage debt positions play an important role in the transmission mechanism of fiscal policy.

Presented at: Computing in Economics and Finance (CEF) 28th International Conference  (virtual); Western Economic Association International - Korean American Economic Association (WEAI-KAEA) 96th Annual Conference (virtual); Korean Economic Review (KER) International Conference (virtual); Southern Economic Association (SEA) 91st Annual Meeting (Houston, TX);

Abstract (to be updated) 

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