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Household debt and the dynamic effects of income tax changes

  • Cloyne, James

    (Bank of England)

  • Surico, Paolo

    ()

    (London Business School)

Using a long span of expenditure survey data and a new narrative measure of exogenous income tax changes for the United Kingdom, we show that households with mortgage debt exhibit large and persistent consumption responses to changes in their income. Homeowners without a mortgage, in contrast, do not appear to react, with responses not statistically different from zero at all horizons. Splitting the sample by age and education yields more limited evidence of heterogeneity as the distributions of these demographics tend to overlap across housing tenure groups. We interpret our findings through the lens of traditional and more recent theories of liquidity constraints, providing a novel interpretation for the aggregate effects of tax changes on the economy.

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Paper provided by Bank of England in its series Bank of England working papers with number 491.

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Length: 61 pages
Date of creation: 28 Mar 2014
Date of revision:
Handle: RePEc:boe:boeewp:0491
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