Seminar in Macroeconomics - Down-payment requirements and consumption responses to income shocks

Montag, 24. April 2023
12 bis 13:15 Uhr


Veranstaltet von
Chair of International Macroeconomics

Vortragende Person/Vortragende Personen:
Karin Kinnerud (BI Norwegian Business School)

Down-payment requirements and consumption responses to income shocks

(with Kasper Kragh Balke and Markus Karlman)

Abstract: This paper studies how down-payment requirements for house purchases affect household consumption. We show that the marginal propensity to consume (MPC)
increases for some households and decreases for others as a result of stricter down-payment regulations. This stands in sharp contrast to the positive relationship between MPC and a traditional borrowing constraint. We also show that the mean MPC in the economy is U-shaped in the down-payment constraint, a finding that rests on an important interaction with the traditional borrowing limit. To quantify this relationship, we construct an incomplete-markets heterogeneous-household model, calibrated to the U.S. economy. We find that the mean MPC is minimized at a down-payment constraint of 40 percent, which is associated with a 5 percent reduction in the mean MPC from its current level. Moreover, we show that the effectiveness of monetary policy is reduced under stricter down-payment requirements and fiscal transfers have a larger impact if targeting low-income households.