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Wealth shocks, unemployment shocks and consumption in the wake of the Great Recession

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  • Christelis, Dimitris
  • Georgarakos, Dimitris
  • Jappelli, Tullio

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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Bibliographic Info

Paper provided by Center for Financial Studies (CFS) in its series CFS Working Paper Series with number 2011/27.

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Date of creation: 2011
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Handle: RePEc:zbw:cfswop:201127

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

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  1. Guiso, Luigi & Jappelli, Tullio & Pistaferri, Luigi, 2002. "An Empirical Analysis of Earnings and Employment Risk," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(2), pages 241-53, April.
  2. Maria Jose Luengo-Prado & Bent E. Sorensen & Dmytro Hryshko, 2009. "House Prices and Risk Sharing," 2009 Meeting Papers, Society for Economic Dynamics 234, Society for Economic Dynamics.
  3. Case, Karl E. & Quigley, John M. & Shiller, Robert J., 2012. "Comparing Wealth Effects: The Stock Market versus The Housing Market," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt6px1d1sc, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  4. Michael Hurd & Susann Rohwedder, 2010. "Effects of the Financial Crisis and Great Recession on American Households," Working Papers, RAND Corporation Publications Department 810, RAND Corporation Publications Department.
  5. Todd Sinai & Nicholas S. Souleles, 2005. "Owner-Occupied Housing as a Hedge Against Rent Risk," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(2), pages 763-789, May.
  6. Jesse Bricker & Brian K. Bucks & Arthur Kennickell & Traci L. Mach & Kevin Moore, 2011. "Drowning or Weathering the Storm? Changes in Family Finances from 2007 to 2009," NBER Working Papers 16985, National Bureau of Economic Research, Inc.
  7. F. Thomas Juster & Joseph P. Lupton & James P. Smith & Frank Stafford, 2004. "The decline in household saving and the wealth effect," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2004-32, Board of Governors of the Federal Reserve System (U.S.).
  8. Angus Deaton, 2011. "The Financial Crisis and the Well-Being of America," NBER Chapters, in: Investigations in the Economics of Aging, pages 343-368 National Bureau of Economic Research, Inc.
  9. 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, MIT Press, vol. 8(6), pages 1179-1207, December.
  10. Martin Browning & Thomas F. Crossley, 2001. "The lifecycle model of consumption and saving," IFS Working Papers, Institute for Fiscal Studies W01/15, Institute for Fiscal Studies.
  11. Juan Contreras & Joseph Nichols, 2010. "Consumption responses to permanent and transitory shocks to house appreciation," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2010-32, Board of Governors of the Federal Reserve System (U.S.).
  12. María José Luengo-Prado & Bent E. Sørensen, 2008. "What Can Explain Excess Smoothness and Sensitivity of State-Level Consumption?," The Review of Economics and Statistics, MIT Press, vol. 90(1), pages 65-80, February.
  13. Engelhardt, Gary V., 1996. "House prices and home owner saving behavior," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 26(3-4), pages 313-336, June.
  14. Melvin Stephens Jr., 2003. "The Consumption Response to Predictable Changes in Discretionary Income: Evidence from the Repayment of Vehicle Loans," NBER Working Papers 9976, National Bureau of Economic Research, Inc.
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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.
  2. Sule Alan & Thomas Crossley & Hamish Low, 2012. "Saving on a rainy day, borrowing for a rainy day," IFS Working Papers, Institute for Fiscal Studies W12/11, Institute for Fiscal Studies.
  3. McCarthy, Yvonne & McQuinn, Kieran, 2013. "Price expectations, distressed mortgage markets and the housing wealth effect," Research Technical Papers 06/RT/13, Central Bank of Ireland.
  4. Brown, Martin, 2013. "The transmission of banking crises to households : lessons from the 2008-2011 crises in the ECA region," Policy Research Working Paper Series 6528, The World Bank.
  5. James Banks & Rowena Crawford & Thomas Crossley & Carl Emmerson, 2012. "The effect of the financial crisis on older households in England," IFS Working Papers, Institute for Fiscal Studies W12/09, Institute for Fiscal Studies.

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