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ISER Internal Seminar: Heterogeneous Wealth Effects on Consumption for Older Homeowners with Unobservable Borrowing Constraints Internal seminar

Abstract: This paper studies the marginal propensity to consume out of wealth (MPC) for heterogeneous older homeowners. It considers two aspects of heterogeneity, i.e. different preferences and different circumstances (cash-on-hand). In a structural model these two aspects generate alternative portfolio regimes that reflect different degrees of proximity to borrowing constraints. But empirically we cannot observe which households are constrained in safe, risky or housing finance and housing. To determine the classification of regimes, I fit a multivariate Gaussian mixture model via a censored data expectation-maximisation (EM) algorithm on data from Wealth and Asset Survey (WAS). Based on the classification results, I estimate the structural parameters by minimising the difference between the model predicted consumption with imputed consumption from the data for older homeowners. The estimation results show that households with binding borrowing constraints (group 1) have highest MPC (close to 1 on average), i.e. they behave in a hand-to-mouth way. This may suggest a stimulus is most effective for the borrowing constrained, low net-worth households since their consumption is more sensitive to a wealth shock. I also find the MPC declines with total wealth, which is in line with the existing literature. The estimated average MPC (0.86) is bigger than in the existing literature (Jappelli and Pistaferri, 2014; Sahm et al., 2010), which may be a result of a shorter planning horizon and thereby less risk faced by older homeowners I use for estimation.

Presented by

Zhechun He (Economics)

Date & time

08 May 2019, 12:30


2N2.5B.24 - ISER Boardroom [Note change from usual venue]

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