International Finance Discussion Papers (IFDP)
Housing Choices and Their Implications for Consumption Heterogeneity
Eva de Francisco
This paper proposes a model to jointly explain some of the heterogeneous individual consumption behavior found in the recent empirical literature, such as the existence of a significant size of wealthy hand-to-mouth consumers, and negative marginal propensities to consume associated with housing upgrades. Agents live for a finite horizon, are heterogeneous in initial wealth, and can save in a liquid asset, and in an illiquid housing asset, that also provides housing services. When housing choices are very limited, the model replicates these empirical findings. Moreover, in the presence of unanticipated income shocks and endogenous credit constraints, this richness in marginal propensities to consume has significant implications for aggregate consumption, and helps explain the consumption behavior documented during the Great Recession as well as the consumption responses to recent tax rebates.
Keywords: The Great Recession, housing choices, consumption heterogeneity, wealthy hand-to-mouth consumers
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