To improve estimates of household consumption behavior, we extend a widely-used
model by allowing for dynamic consumption elasticities with respect to transitory income shocks. Applying our model to biennial household survey data, we find a significant structural break in marginal propensities to consume from before to after the housing market boom and bust just prior to the Great Recession, with the average level for all households estimated to have increased by more than 40%. There is important heterogeneity across households grouped by different balance sheet characteristics and our results suggest the increase for all households was driven by higher short-run consumption elasticities for homeowners with low liquid wealth. The change appears to be related to tighter borrowing constraints for homeowners more than a shift in wealth distributions.
