DP11829 The Consumption Response to Positive and Negative Income Changes

Author(s): Philip Bunn, Jeanne LeRoux, Kate Reinold, Paolo Surico
Publication Date: February 2017
Keyword(s): Heterogeneity, household balance sheet, MPC asymmetry, transmission mechanism
JEL(s): D12, E21, E52
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11829

A set of newly added questions in the 2011 to 2014 Bank of England/NMG Consulting Survey reveals that British households tend to change their consumption by significantly more in reaction to temporary and unanticipated falls in income than to rises of the same size. Household balance sheet characteristics (including the presence of a savings buffer), concerns about credit market access and higher subjective risk of lower future income account for a sizable share of this spending asymmetry and explain significant variation in the marginal propensity to consume across households. Our findings have important implications for predicting the response of aggregate consumption to expansionary and contractionary macroeconomic policies.