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Wealth Shocks, Unemployment Shocks and Consumption in the Wake of the Great Recession

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Abstract

We use data from the 2009 Internet Survey of the Health and Retirement Study to examine the consumption impact of wealth shocks and unemployment during the Great Recession in the US. We find that many households experienced large capital losses in housing and in their financial portfolios, and that a non-trivial fraction of respondents have lost their job. As a consequence of these shocks, many households reduced substantially their expenditures. We estimate that the marginal propensities to consume with respect to housing and financial wealth are 1 and 3.3 percentage points, respectively. In addition, those who became unemployed reduced spending by 10 percent. We also distinguish the effect of perceived transitory and permanent wealth shocks, splitting the sample between households who think that the stock market is likely to recover in a year’s time, and those who don’t. In line with the predictions of standard models of intertemporal choice, we find that the latter group adjusted much more than the former its spending in response to financial wealth shocks.

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 279.

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Date of creation: 24 Mar 2011
Date of revision: 19 Oct 2011
Handle: RePEc:sef:csefwp:279

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Keywords: Marginal Propensity to Consume; Wealth Shocks; Unemployment;

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Cited by:
  1. Angus Deaton, 2012. "The financial crisis and the well-being of Americans," Oxford Economic Papers, Oxford University Press, vol. 64(1), pages 1-26, January.

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