IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

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

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

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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://econstor.eu/bitstream/10419/57347/1/671918419.pdf
Download Restriction: no

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

as
in new window

Length:
Date of creation: 2011
Date of revision:
Handle: RePEc:zbw:cfswop:201127
Contact details of provider: Postal:
House of Finance, Grüneburgplatz 1, HPF H5, D-60323 Frankfurt am Main

Phone: +49 (0)69 798-30050
Fax: +49 (0)69 798-30077
Web page: http://www.ifk-cfs.de/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. John Y. Campbell & Joao F. Cocco, 2004. "How Do House Prices Affect Consumption? Evidence From Micro F. Data," Harvard Institute of Economic Research Working Papers 2045, Harvard - Institute of Economic Research.
  2. Tullio Jappelli & Luigi Pistaferri, 2010. "The Consumption Response to Income Changes," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 479-506, 09.
  3. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
  4. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
  5. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  6. Maria Jose Luengo-Prado & Bent E. Sorensen & Dmytro Hryshko, 2009. "House Prices and Risk Sharing," 2009 Meeting Papers 234, Society for Economic Dynamics.
  7. Lusardi, Annamaria, 1996. "Permanent Income, Current Income, and Consumption: Evidence from Two Panel Data Sets," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 81-90, January.
  8. Michael Hurd & Susann Rohwedder, 2010. "Effects of the Financial Crisis and Great Recession on American Households," Working Papers 810, RAND Corporation.
  9. Gourieroux, Christian & Monfort, Alain & Trognon, Alain, 1984. "Pseudo Maximum Likelihood Methods: Theory," Econometrica, Econometric Society, vol. 52(3), pages 681-700, May.
  10. Ludwig, Alexander & Sløk, Torsten, 2004. "The relationship between stock prices, house prices and consumption in OECD," Sonderforschungsbereich 504 Publications 04-12, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
  11. Orazio P. Attanasio & Laura Blow & Robert Hamilton & Andrew Leicester, 2009. "Booms and Busts: Consumption, House Prices and Expectations," Economica, London School of Economics and Political Science, vol. 76(301), pages 20-50, 02.
  12. Juan Contreras & Joseph B. Nichols, 2010. "Consumption responses to permanent and transitory shocks to house appreciation," Finance and Economics Discussion Series 2010-32, Board of Governors of the Federal Reserve System (U.S.).
  13. Matthew D. Shapiro, 2010. "The Effects of the Financial Crisis on the Well-Being of Older Americans: Evidence from the Cognitive Economics Study," Working Papers wp228, University of Michigan, Michigan Retirement Research Center.
  14. Melvin Stephens, 2008. "The Consumption Response to Predictable Changes in Discretionary Income: Evidence from the Repayment of Vehicle Loans," The Review of Economics and Statistics, MIT Press, vol. 90(2), pages 241-252, May.
  15. Matthew D. Shapiro & Joel Slemrod, 2001. "Consumer Response to Tax Rebates," NBER Working Papers 8672, National Bureau of Economic Research, Inc.
  16. Martin Lettau & Sydney Ludvigson, 2003. "Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption," NBER Working Papers 9848, National Bureau of Economic Research, Inc.
  17. Christopher D. Carroll, 2005. "The Method of Endogenous Gridpoints for Solving Dynamic Stochastic Optimization Problems," NBER Technical Working Papers 0309, National Bureau of Economic Research, Inc.
  18. Sumit Agarwal & Chunlin Liu & Nicholas S. Souleles, 2007. "The Reaction of Consumer Spending and Debt to Tax Rebates-Evidence from Consumer Credit Data," Journal of Political Economy, University of Chicago Press, vol. 115(6), pages 986-1019, December.
  19. Luigi Pistaferri, 2001. "Superior Information, Income Shocks, And The Permanent Income Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 465-476, August.
  20. F. Thomas Juster & Joseph P. Lupton & James P. Smith & Frank Stafford, 2006. "The Decline in Household Saving and the Wealth Effect," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 20-27, February.
  21. M. Dolores Collado & Martín Browning, 1999. "-The Response Of Expenditures To Anticipated Income Changes: Panel Data Estimates," Working Papers. Serie AD 1999-19, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
  22. Nicholas S. Souleles & Jonathan A. Parker & David S. Johnson, 2006. "Household Expenditure and the Income Tax Rebates of 2001," American Economic Review, American Economic Association, vol. 96(5), pages 1589-1610, December.
  23. Gourieroux, Christian & Monfort, Alain & Trognon, Alain, 1984. "Pseudo Maximum Likelihood Methods: Applications to Poisson Models," Econometrica, Econometric Society, vol. 52(3), pages 701-20, May.
  24. Bent E. Sørensen & Maria Jose Luengo-Prado, 2005. "What Can Explain Excess Smoothness and Sensitivity of State-Level Consumption?," Working Papers 2005-03, Department of Economics, University of Houston.
  25. Guiso, Luigi & Jappelli, Tullio & Pistaferri, Luigi, 2002. "An Empirical Analysis of Earnings and Employment Risk," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 241-53, April.
  26. Todd Sinai & Nicholas S. Souleles, 2003. "Owner-Occupied Housing as a Hedge Against Rent Risk," NBER Working Papers 9462, National Bureau of Economic Research, Inc.
  27. Karl E. Case & Robert J. Shiller & John M. Quigley, 2001. "Comparing Wealth Effects: The Stock Market Versus the Housing Market," NBER Working Papers 8606, National Bureau of Economic Research, Inc.
  28. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers W04/28, Institute for Fiscal Studies.
  29. Hubbard, R Glenn & Skinner, Jonathan & Zeldes, Stephen P, 1995. "Precautionary Saving and Social Insurance," Journal of Political Economy, University of Chicago Press, vol. 103(2), pages 360-99, April.
  30. Atif Mian & Kamalesh Rao & Amir Sufi, 2013. "Household Balance Sheets, Consumption, and the Economic Slump," The Quarterly Journal of Economics, Oxford University Press, vol. 128(4), pages 1687-1726.
  31. Browning, Martin & Crossley, Thomas F., 2001. "Unemployment insurance benefit levels and consumption changes," Journal of Public Economics, Elsevier, vol. 80(1), pages 1-23, April.
  32. 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.
  33. Kenneth Train, 2003. "Discrete Choice Methods with Simulation," Online economics textbooks, SUNY-Oswego, Department of Economics, number emetr2, December.
  34. Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 1-55.
  35. Alexander Ludwig & Torsten Sløk, 2004. "The relationship between stock prices, house prices and consumption in OECD countries," MEA discussion paper series 04044, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  36. Barry Scholnick, 2013. "Consumption Smoothing after the Final Mortgage Payment: Testing the Magnitude Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 95(4), pages 1444-1449, October.
  37. Papke, Leslie E & Wooldridge, Jeffrey M, 1996. "Econometric Methods for Fractional Response Variables with an Application to 401(K) Plan Participation Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(6), pages 619-32, Nov.-Dec..
  38. Martin Browning & Thomas F. Crossley, 2001. "The Life-Cycle Model of Consumption and Saving," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 3-22, Summer.
  39. Charles F. Manski, 2004. "Measuring Expectations," Econometrica, Econometric Society, vol. 72(5), pages 1329-1376, 09.
  40. Engelhardt, Gary V., 1996. "House prices and home owner saving behavior," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 313-336, June.
  41. Brahima Coulibaly & Geng Li, 2006. "Do Homeowners Increase Consumption after the Last Mortgage Payment? An Alternative Test of the Permanent Income Hypothesis," The Review of Economics and Statistics, MIT Press, vol. 88(1), pages 10-19, February.
  42. 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.
  43. Banks, James & Blundell, Richard & Tanner, Sarah, 1998. "Is There a Retirement-Savings Puzzle?," American Economic Review, American Economic Association, vol. 88(4), pages 769-88, September.
  44. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jiri, 2010. "How large are housing and financial wealth effects? A new approach," Working Paper Series 1283, European Central Bank.
  45. 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.
  46. Fumio Hayashi, 1985. "The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1083-1113.
  47. Disney, Richard & Andrew Henley & David Jevons, 2002. "House Price Shocks, Negative Equity and Household Consumption in the UK in the 1990s," Royal Economic Society Annual Conference 2002 64, Royal Economic Society.
  48. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
  49. Michael D. Hurd & Susann Rohwedder, 2010. "The Effects of the Economic Crisis on the Older Population," Working Papers wp231, University of Michigan, Michigan Retirement Research Center.
  50. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:zbw:cfswop:201127. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.