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The Effect of Unemployment, Arrears and Negative Equity on Consumption: Ireland in 2009/10

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  • Gerlach, Petra

Abstract

Since the onset of the financial crisis, income and consumption have fallen sharply in Ireland, particularly for young households. This paper shows that young households are more likely than older ones to be exposed to unemployment, arrears and negative equity. These may give rise to credit constraints and buffer-stock savings. Savings may be built up not only to finance future consumption, but also to deleverage, since high indebtedness makes the access to additional credit more difficult. We show that the permanent income hypothesis, which posits that consumption should evolve more smoothly than actual income, apparently fails to hold for households in negative equity, at risk thereof and at risk of unemployment. This may have caused much of the decline in aggregate consumption during the crisis.

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Bibliographic Info

Paper provided by Economic and Social Research Institute (ESRI) in its series Papers with number WP457.

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Date of creation: May 2013
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Handle: RePEc:esr:wpaper:wp457

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Keywords: Credit constraints; Ireland; Household Budget Survey;

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  1. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  2. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
  3. Tim Callan & Brian Nolan & Claire Keane & Michael Savage & John Walsh, 2014. "Crisis, response and distributional impact: the case of Ireland," IZA Journal of European Labor Studies, Springer, vol. 3(1), pages 1-17, December.
  4. Stephen P. Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 16-88, Wharton School Rodney L. White Center for Financial Research.
  5. Bernanke, Ben, 1985. "Adjustment costs, durables, and aggregate consumption," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 41-68, January.
  6. Pagan, Adrian, 1984. "Econometric Issues in the Analysis of Regressions with Generated Regressors," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 221-47, February.
  7. Richard Disney & John Gathergood & Andrew Henley, 2010. "House Price Shocks, Negative Equity, and Household Consumption in the United Kingdom," Journal of the European Economic Association, MIT Press, vol. 8(6), pages 1179-1207, December.
  8. Lydon, Reamonn & O'Hanlon, Niall, 2012. "Housing Equity Withdrawal, Property Bubbles and Consumption," Research Technical Papers 05/RT/12, Central Bank of Ireland.
  9. Milton Friedman, 1957. "Introduction to "A Theory of the Consumption Function"," NBER Chapters, in: A Theory of the Consumption Function, pages 1-6 National Bureau of Economic Research, Inc.
  10. Hogan, Vincent & O'Sullivan, Pat, 2007. "Consumption and House Prices in Ireland," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI), vol. 2007(3-Autumn), pages 46-61.
  11. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  12. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, May.
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