Abstract: We examine how the effects of government spending shocks depend on the balance-sheet position of households. Employing U.S. household survey data, we find a large, positive consumption response for households with mortgage debt, smaller response for renters, and an insignificant response for outright homeowners, in response to a positive government spending shock. We consider a model with three types of households and show that it can successfully account for these findings. Liquidity constraints and wealth effects play a crucial role in shock propagation. Our findings suggest the importance of household mortgage debt position in the transmission mechanism of fiscal policy.

Abstract: We examine how consumers adjust their spending in response to anticipated income changes and how these adjustments vary with the size of the income change. Using data from the Bank of Korea on credit card expenditure following an individual's final car loan payment —a predictable increase in discretionary income— we find an average marginal propensity to consume (MPC) of 18 percent. Our findings indicate a significant sensitivity of spending to the size of payments relative to quarterly income,  highlighting a notable deviation from consumption-smoothing behavior for smaller income changes. We also observe a strong size-dependent MPC regardless of liquidity constraints. These results have important implications for predicting consumption responses to fiscal policies. 

Abstract: This paper investigates the relationship between U.S. economic policy uncertainty (EPU) and the Volatility Index (VIX). Since a significant structural shift in 2016, the previously strong positive correlation between these two indicators has weakened considerably. We hypothesize that this divergence is influenced by missing term information in the EPU. Therefore, we explore how variations in the VIX futures term structure have contributed to this divergence. Our findings indicate that widening the VIX futures term spread correlates with a reduced divergence between policy uncertainty and market volatility. Conversely, a rise in the long-term factor of the term structure is associated with a greater gap, suggesting that certain economic conditions may heighten perceived policy uncertainty more than they affect market volatility. These insights provide a deeper understanding of the complex dynamics between market volatility, economic policy uncertainty, and broader economic conditions during periods of economic stress.

Selected for: College of Liberat Arts (CLLA) Graduate  Summer Rearch Grant project;