Household Debt and the Dynamic Effects of Income Tax Changes

Using a new narrative measure of fiscal policy shocks for the United Kingdom, we show that households with mortgage debt exhibit large and significant consumption responses to tax changes. Home-owners 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.

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