Dimitrios Christelis, University of Salerno; Dimitris Georgarakos, Goethe University Frankfurt; and Tullio Jappelli, University of Naples Federico II
Wealth Shocks, Unemployment Shocks, and Consumption in the Wake of the Great Recession
Christelis, Georgarakos, and Jappelli 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 United States. They find that many households experienced large capital losses in housing and in their financial portfolios, and that a non-trivial fraction of respondents lost their job. As a consequence of these shocks, many households substantially reduced their expenditures. The authors estimate that the marginal propensities to consume with respect to housing and financial wealth were one and 3.3 percentage points, respectively. In addition, those who became unemployed reduced spending by 10 percent. The researchers 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, they find that the latter group adjusted its spending much more than the former in response to financial wealth shocks.
James M. Poterba; Steven Venti, Dartmouth College and NBER; and David A. Wise, Harvard University and NBER
The Asset Cost of Poor Health (NBER Working Paper No. 16389)
Poterba, Venti, and Wise examine the correlation between poor health and asset accumulation for households in the first nine waves of the Health and Retirement Survey. Rather than enumerating the specific costs of poor health, such as out-of-pocket medical expenses or lost earnings, they estimate how the evolution of household assets is related to poor health. They construct a simple measure of health status based on the first principal component of the HRS survey's responses on self-reported health status, diagnoses, and various other indicators of underlying health. Their estimates suggest large and substantively important correlations between poor health and asset accumulation. They compare persons in each 1992 asset quintile who were in the top third of the 1992 distribution of latent health with those in the same 1992 asset quintile who were in the bottom third of the latent health distribution. By 2008, those in the top third of the health distribution had accumulated, on average, more than 50 percent more assets than those in the bottom third of the health distribution. This "asset cost of poor health" appears to be larger for persons with substantial 1992 asset balances than for those with lower balances.
Sule Alan, Tom Crossley, and Hamish Low, University of Cambridge
Household Consumption Behavior in Recessions
A striking feature of recent recessions has been the decline in consumption relative to income, and the associated increase in the
aggregate saving rate. This raises the question of why households are not willing to borrow, or draw down their savings, to smooth consumption through recessions. Alan, Crossley, and Low provide new evidence on how the spikes in saving rates during recessions differ by household age, and then use a calibrated life-cycle model to analyze the rise in the savings rate through both recessions and asset price declines. Their analysis recognizes that recessions have multiple effects: a decline in income, often accompanied by a decline in asset values, and an increase in the uncertainty of future income. The calibration analysis, using UK data, suggests that in order to explain an increase in saving rates across nearly all age groups, which is what the data indicate, the onset of a recession must be accompanied by an increase in uncertainty about future income.
Marianne Bertrand, University of Chicago and NBER, and Adair Morse, University of Chicago
Consumption Contagion: Does the Consumption of the Very Rich Drive the Consumption of the Less Rich?
Bertrand and Morse ask whether a consumption mechanism could link the growing inequality in the United States (attributable to the rising incomes of the rich) and the declining saving rate over the last three decades. In particular, does rising consumption among the increasingly better off households induce the relatively worse off households to spend a higher share of their disposable income? The authors exploit variation across geographic markets and over time, holding everything else constant, and establish that such vertical consumption correlations do occur. They find no evidence of permanent income effects or misguided expectations, but they do find evidence that visible increased consumption by the rich induces status-seeking or status-maintaining consumption by the less rich.
Song Han, Benjamin Keys, and Geng Li, Federal Reserve Board
Credit Supply to Bankrupt Consumers: Evidence from Credit Card Mailings
Are bankrupt consumers excluded from the unsecured credit market? Using a unique dataset of credit card mailings, co-authors Han, Keys, and Li directly explore the supply of unsecured credit to consumers with the most conspicuous default risk-those with a bankruptcy history. On average, over one-fifth of bankrupt consumers receive at least one offer in a given month, with the likelihood being even higher for those who filed for bankruptcy within the previous two years. However, offers to bankrupt consumers carry substantially less favorable terms than those to comparable non-bankrupt consumers, with higher interest rates, lower credit limits, a greater likelihood of having an annual fee, and a smaller likelihood of having rewards or promotions. In addition, the analysis of credit terms typically disclosed only in the fine print suggests that offers to filers tend to include more "hidden" costs.