Risk Sharing, Vulnerability and the Global Financial Crisis

Abstract

Tests using Household, Income and Labour Dynamics in Australia (HILDA) unit record data from 2006/2007 to 2010/2011 indicate that Australian households on average insure against idiosyncratic income shocks. For a 10% change in income, non-durable expenditures change by 0.14%, while food expenditures change by 0.05%; both results are statistically insignificant. Non-durable expenditures respond asymmetrically to positive and negative shocks, especially during the Global Financial Crisis, as a 10% income rise results consumption rising by 0.1%, while a 10% income decline results in consumption declining by 0.6%; the latter result is statistically significant. Controlling for risk tolerance heterogeneity yields identical results.

Keywords: Asymmetric Shocks, Consumption Insurance/Risk-Sharing, Financial Crises, HILDA, Vulnerability

JEL Classification: D91, E21, G01, O56