THE ASYMMETRIC RESPONSE OF CONSUMPTION TO INCOME CHANGES AND THE EFFECT OF LIQUID WEALTH

Milan van den Heuvel, Benjamin Vandermarliere () and Koen Schoors

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: We investigate the consumption response to positive and negative income changes conditional on the presence of liquid wealth. By constructing a novel data set from transaction-level financial data, we home in on a population which holds minimal consumer and mortgage debt, and holds most of its wealth, if any, as liquid wealth. We find an asymmetric consumption response to income changes, with a higher response to income increases than to income decreases. We further find that this asymmetry can be explained by a higher consumption smoothing e ect of liquid wealth for income decreases than for income increases.

Keywords: income changes; consumption; liquid wealth; marginal propensity to consume; revealed behaviour (search for similar items in EconPapers)
Pages: 16 pages
Date: 2019-02
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:19/958

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