Policy, Household Assets And Liabilities, And Consumptio

At present,China has entered a new stage of development.Building a new development pattern and promoting high-quality economic development require us to firmly grasp the "strategic base point of domestic demand".The report of the 20 th National Congress of the Communist Party of China also pointed out that "the implementation of the strategy of expanding domestic demand should be organically combined with the deepening of supply-side structural reform to enhance the endogenous driving force and reliability of the domestic circulation".As an important part of domestic demand,Households’ consumption demand is an important starting point for promoting China’s high-quality development,and should receive more extensive attention from academia and government.In recent years,China’s household consumption rate has been sluggish,and the problem of household debt overhang problem is relatively serious,and housing assets account for nearly 70% of household assets.Compared with European and American countries,the development of financial markets is also lagging,and households are constrained by credit and cannot refinance their housing assets.In this context,what is the liquidity constraint situation of Chinese households,how does housing debts affect the liquidity status of Chinese households,and how will the consumption of households which are liquidity constrained be affected? It can be seen from the literature that the refinancing is an important channel for the transmission of foreign country monetary policy,and in the absence of refinancing in China,will monetary policy affect household consumption by affecting house purchases,housing mortgages,etc.,and to what extent? Does the lack of refinancing affect the savings and house purchase behavior of Chinese households,so that Chinese residents have different marginal consumption propensities,which in turn makes the effect of China’s fiscal policy for households different from that of European and American countries? If China introduces a refinancing market,how will households’ consumption,savings,house purchase and housing mortgage behavior change?This dissertation is divided into seven chapters,the first of which is an introduction,and the second chapter reviews the literature.Chapter 3 studies the causes of household liquidity constraints in China,the inhibiting impact of liquidity constraints on aggregate demand,and the amplifying effect of liquidity constraints on the negative impact of the Covid-19 pandemic.Using the China Family Panel Studies(CFPS)2010-2018 and Internet data during the pandemic,we analyze the impact of the "income effect" caused by income decline and the "debt overhang effect" caused by real estate boom on household liquidity constraints.Furthermore,we also explore the amplifying effect of liquidity constraints on negative demand shocks during the pandemic.This chapter finds that,liquidity of Chinese households had been gradually deteriorating before the pandemic,specially,from 2010 to 2018,the ratio of China’s households who were subject to liquidity constraint was increasing from 24.37% to 35.31%.For the middle-income class,compared with the "income effect",the "debt overhang effect" is more significant,and is the main driver of making households possibly subject to liquidity constraints.Meanwhile,liquidity constraints significantly affect consumption,compared with households without liquidity constraints,households with liquidity constraints will decrease their consumption by 6.9 percent.To the amplifying effect of liquidity constraints on the impact of pandemic,this chapter finds that,compared with homeowners without mortgage,homeowners with mortgage and households without housing both reduced more consumption,saved more,are also more likely to fall into liquidity constraints,and more conservative on consumption in the second half of 2020.This chapter not only provides a new explanation for the sluggish consumption in China,but also provides a basis for demand-side reform.Chapter 4 describes the baseline model used in this dissertation.The model is a dynamic discrete choice model that includes liquid assets,illiquid housing,and mortgages.In the model,the market is incomplete,reflected in the existence of borrowing constraints subject to households,and the model also considers the life cycle characteristics of households.Households are subject to an individual heterogeneous income shock in each period,and cannot be fully insured against that shock.The utility of the family comes from ordinary consumption and housing services,which can be obtained through the purchase of housing or through rental housing.In addition to providing utility,housing also has investment properties,that is,in addition to consumption savings and other behaviors,households can also choose whether to invest in housing and the size of the housing,and can mortgages when buying houses,that is,households have three assets such as liquid assets,housing and mortgages.The core feature of the model is that housing is an illiquid asset,and the illiquidity of housing asset is reflected in two aspects: first,households need to pay adjustment costs to adjust the size of housing;Second,due to the lack of a home equity loan market in China,households cannot refinance the portion of their home equity that still has loans unpaid.Due to the illiquid nature of housing,households have three options of renting,adjusting houses,and not adjusting houses in each period,and households must choose the decision to maximize their utility among these three options,so the model in this dissertation is a dynamic discrete choice model.At the same time,in addition to the ordinary borrowing constraints,if the family chooses to use a mortgage when buying a house,it faces a borrowing constraint.Chapter 5 points out that not only is monetary policy state-dependent,but it is also duration-dependent,by exploring how monetary policy affects household consumption through household balance sheets.Based on the characteristics of the rapid growth of household housing assets and household debt in China,this chapter uses the heterogeneous agent dynamic discrete choice life cycle model in chapter 4that includes state variables such as liquid assets,real estate and housing mortgage loans,and then discusses the impact of monetary policy on household consumption.The chapter finds that the impact of interest rates decline on household consumption depends on how long the decline lasts.When the decline of interest rates lasts for a short time,due to the income effect generated by the lower mortgage loan costs in the short term,consumption demand rises first,but will return to the initial state at last.When interest rates are kept low for a long time,as the income effect is gradually replaced by substitution effect,debt overhang effect,and precautionary saving effect,consumption demand first rises,then falls,and eventually falls even below the initial state.Based on these results,this chapter concludes that to accelerate the establishment of a "dual circulation" development pattern and implement the strategy of expanding domestic demand,prudent monetary policy should be well implemented,avoiding the formation of public expectations of a loose monetary environment;Moreover,the government needs to improve the housing rental market to protect the rights and interests of the young and other groups.Chapter 6 explores how fiscal subsidy policy affects household consumption,pointing out that there is a significant consumption stimulation effect of a redistributive fiscal policy in a country with high household saving rate,such as China.This chapter argues the refinancing channel of home equity is the key to understand this question.In an incomplete-market setting,if households can refinance,liquidity-constrained households can smooth consumption using the home equity loan,so the consumption change induced by the transitory fiscal support is not so large.But if households cannot refinance: firstly,households need to accumulate more liquid assets for the future income uncertainty and the mortgage payment motive;secondly,liquidity-constrained households cannot smooth consumption and self-insure the income risk without refinancing.Both of the two facts lead to a combination of high saving and high Marginal Propensity to Consume(MPC).Using the incomplete markets multiple assets life cycle model constructed in Chapter 4,this chapter finds,not only the short-term effect,but also the accumulation effect of fiscal policy in China are larger than countries with refinancing market.This chapter provides a micro foundation of the fiscal support during the pandemic and sheds new light on the understanding of the spur China’s domestic demand.Chapter 7 discusses the impact of the introduction of refinancing policies on household consumption through the heterogeneous agent dynamic discrete choice life cycle model constructed in Chapter 4.This chapter finds that:(1)the introduction of refinancing policies will boost consumption in both the short and long term;(2)After the introduction of the refinancing policy,although the willingness of households to own a house will increase,it will not cause a significant increase in housing prices;(3)After the introduction of refinancing policies,savings will decline.Further,this chapter analyzes the mechanisms of the above results:(1)the precautionary saving motive of households decreases because refinancing allows households to obtain funds without adjusting housing.Liquid assets are an important carrier of precautionary savings,so household savings decline,and the decline in savings also allows households to have more funds that can be used for consumption;(3)As an asset,housing asset is also an important means of household precautionary savings,for house-owners,after the introduction of refinancing policies in the economy,housing may be adjusted to a smaller-area house,that is,at the intensive margin,household demand for housing declines,which on the one hand will increase the available funds for households,on the other hand,it will also inhibit the rise in housing prices;(4)Refinancing policies can also promote household consumption growth by improving the financing constraints of some households.Accordingly,in order to promote high-quality economic development and expand consumer demand,the government should continue to deepen financial supply-side reforms,including the introduction of refinancing policies.Chapter 8 summarizes the full dissertation,makes policy recommendations,and points out future research directions.