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Household debt and the dynamic effects of income tax changes


Review of Economic Studies



Authors / Editors

Cloyne J;Surico P


Publication Year



Using a new narrative measure of fiscal policy shocks for the U.K., we show that households with mortgage debt exhibit large and significant consumption responses to tax changes. Homeowners 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.


Fiscal policy; Narrative tax changes; Household debt

Available on ECCH


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