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Household Balance Sheets and Consumption Responses to Income Shocks

Author

Listed:
  • Yunho Cho

    (Jinan University)

  • Aarti Singh

    (University of Sydney)

  • James Morley

    (University of Sydney)

Abstract

We examine how households with different balance sheet positions respond to unanticipated transitory and permanent income shocks using panel data from the U.S. and Australia. Our main findings are the following. (i) the consumption response of households with higher debt to a transitory income shock is higher relative to households with lower levels of debt in the U.S. This group of households is distinct from households with low liquid wealth who also respond sensitively to transitory income shocks; (ii) the consumption elasticities from house price shocks are higher for households with higher debt in the U.S.; (iii) our time-varying estimates suggest that consumption of households with higher levels of debt exhibited greater sensitivity to transitory income shocks during the Great Recession and during the housing boom in Australia; and (iv) households with higher net wealth and lower debt have more consumption insurance against permanent income shocks. Our results provide new insights into the relationship between household balance sheets and household consumption and how this relationship has changed over the Great Recession period.

Suggested Citation

  • Yunho Cho & Aarti Singh & James Morley, 2019. "Household Balance Sheets and Consumption Responses to Income Shocks," 2019 Meeting Papers 788, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:788
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    References listed on IDEAS

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    Cited by:

    1. Koval, Pavel & Polbin , Andrey, 2020. "Evaluation of permanent and transitory shocks role in consumption and income dynamics in the Russian Federation," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 57, pages 6-29.
    2. Kartik B. Athreya & Ryan Mather & Jose Mustre-del-Rio & Juan M. Sanchez, 2019. "Financial Distress and Macroeconomic Risks," Working Papers 2019-025, Federal Reserve Bank of St. Louis, revised 22 Oct 2021.
    3. Kartik B. Athreya & Ryan Mather & Jose Mustre-del-Rio & Juan M. Sanchez, 2019. "Consumption in the Great Recession: The Financial Distress Channel," Working Paper 19-13, Federal Reserve Bank of Richmond.
    4. Jorge Miranda-Pinto & Daniel P. Murphy & Kieran Walsh & Eric R. Young, 2020. "Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus," Working Papers 202007, Federal Reserve Bank of Cleveland.

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