Household debt and the dynamic effects of income tax changes

James Cloyne and Paolo Surico

No 491, Bank of England working papers from Bank of England

Abstract: 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.

Keywords: mortgage debt; narrative tax changes; liquidity constraints (search for similar items in EconPapers)
JEL-codes: E21 E62 H31 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2014-03-28
New Economics Papers: this item is included in nep-mac, nep-pbe and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Household Debt and the Dynamic Effects of Income Tax Changes (2017)
Working Paper: Household Debt and the Dynamic Effects of Income Tax Changes (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0491

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