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Household Debt and the Dynamic Effects of Income Tax Changes

January 1, 2017·
James Cloyne
,
Paolo Surico
· 0 min read
Abstract
Using a new narrative measure of fiscal policy shocks for the U.K., we show that households with mortgage debt exhibit large and significant consumption responses to tax changes. Homeowners without a mortgage, in contrast, do not adjust their expenditure, with responses not statistically different from zero at all horizons. We compare our findings to the predictions of traditional and newer theories of liquidity constraints, providing a novel interpretation for the aggregate effects of tax changes on the macroeconomy.
Type
Journal article
Publication
Review of Economic Studies, Volume 84(1), 45-81
publication