Essays on Heterogeneity, Consumption, and Macroeconomic Policies
Abstract
This dissertation consists of two chapters on heterogeneity, consumption, and its implications in macroeconomic policies.
First, 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 that in response to a pos-itive government spending shock, households with mortgage debt have a large, positive consump-tion 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 hous-ing, 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 propaga-tion of government spending shocks. Our findings provide both empirical and theoretical support for the notion that household mortgage debt position plays an important role in the transmission mechanism of fiscal policy.
Second, we examine how consumers respond to anticipated income changes over time, and how their consumption responses vary depending on the magnitude of income changes. Using newly constructed individual-level data based on the Bank of Korea’s household debt database, 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 the individual’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.
Citation
Song, Hyunji (2023). Essays on Heterogeneity, Consumption, and Macroeconomic Policies. Doctoral dissertation, Texas A&M University. Available electronically from https : / /hdl .handle .net /1969 .1 /199130.