Marginal Propensities to Consume Before and After the Great Recession

Using a quasi maximum likelihood approach for a semi-structural model, we obtain precise estimates of consumption responses to idiosyncratic income shocks for households grouped by various balance sheet characteristics. Homeowners stratified by higher and lower liquid wealth exhibit the most heterogeneity in marginal propensities to consume out of transitory income shocks. Time-varying estimates before and after the Great Recession support the importance of homeownership status and balance sheet liquidity, with economically and statistically significant increases in transitory consumption responses for homeowners, especially those with lower liquid wealth, associated with the collapse in house prices. We find permanent consumption responses to transitory income shocks are small and stable across time for different households, while consumption insurance against permanent income shocks is higher for homeowners than renters, but is also stable across time. These findings are consistent with theories of consumption that include housing as an illiquid asset. *This paper is a significant revision of an older paper "Household Balance Sheets and Consumption Responses to Income Shocks" number 2019-11, created in July, 2019.