Latest Research Shows Fiscal and Monetary Policy As Key Drivers
Influencing Household Formation and Behavior
When it comes to forming households—getting married, taking on roommates, or moving back in with mom and dad—fiscal and monetary policy may be driving the decision as much as love or a fondness for friends and family.
That is the focus of new research by Randall Wright, finance professor at the Wisconsin School of Business at the University of Wisconsin-Madison. Together with Mei Dong of the University of Melbourne (Australia) and Ling Sun of Brock University (Canada), Wright has reviewed a range of recent studies and models to consider the connection between macroeconomic policy and household formation. Wright and his coauthors concluded that in addition to having an impact on markets, fiscal and monetary policy affect behavior within households, including the decision to form a household in the first place.
“In the business world, forming a company helps entrepreneurs avoid excessive costs for finding services in the market, such as legal or accounting help, by bringing those services into a corporate structure,” said Wright. “Likewise, many goods and services that individuals demand, such as cooking, cleaning, childcare and even companionship, can be provided either by the market or within the household.”
Wright added, “Forming a household is a partnership, and we often enter into that partnership when economic policies make it beneficial to do so.”
When the market rate for services is high, people are more inclined to set up households. Wright said previous research suggests that being single is cash intensive, with economic data from different countries showing that singles spend more money than married people. A similar study examining a sample of countries over many years to see if marriage rates are affected by fiscal and monetary policy, found that increases in consumption taxes, income taxes, and inflation increase marriage rates. Those economic pressures make the market less attractive, and marriage (or creating a household) more attractive.
“It is important to consider household economics when considering the effects of monetary policy,” said Wright. “Because monetary policy has a particular effect on inflation, it impacts household formation and can have long-lasting effects on the structure of society, which need to be taken into account.”
Wright’s research brief, “Macro Policy and Household Economics”, can be found here.