Anticipated Changes in Household Debt and Consumption

This paper evaluates how anticipated changes in household debt associated with the leveraged purchase of housing a ects consumption. I build a heterogeneous agent model, calibrated to match the distribution of income and wealth within the US economy, in which households are subject to uninsurable income shocks and can save in both liquid and illiquid assets. I show that the marginal propensity to consume of households who are saving for a house deposit is negative as they decrease their consumption in anticipation of being credit constrained after they purchase a house. I verify the model's predictions using micro-data from the PSID to show that (i) consumption falls in anticipation of and after increases in household debt and that (ii) households who are planning on purchasing housing stock have negative marginal propensities to consume. Finally, I use this model to examine the general equilibrium e ects of tax credits for rst home buyers and show that they can lead to a decrease in aggregate consumption. JEL classi cation: D14 , E21, E62.