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

68 Pages Posted: 12 Mar 2015

See all articles by Dimitris Christelis

Dimitris Christelis

Adam Smith Business School, University of Glasgow; Centre for Studies in Economics and Finance (CSEF), University of Naples Federico II; Center for Financial Studies (CFS); Netspar

Dimitris Georgarakos

European Central Bank (ECB) - Directorate General Research; Center for Financial Studies (CFS)

Tullio Jappelli

University of Naples Federico II - Department of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Center for Studies in Economics and Finance - CSEF

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Date Written: March 11, 2015

Abstract

Data from the 2009 Internet Survey of the Health and Retirement Study show that many U.S. households experienced large capital losses in housing and financial wealth, and that 5% of respondents lost their job during the Great Recession. As a consequence of these shocks, many households reduced substantially their expenditures. For every 10% loss in housing and financial wealth, the estimated drop in household expenditure is about 0.56% and 0.9%, respectively. In addition, those who became unemployed reduced spending by 10%. 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 do not. 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.

Keywords: wealth shocks, unemployment, consumption, great recession

JEL Classification: E21, D91

Suggested Citation

Christelis, Dimitrios and Georgarakos, Dimitris and Jappelli, Tullio, Wealth Shocks, Unemployment Shocks and Consumption in the Wake of the Great Recession (March 11, 2015). ECB Working Paper No. 1762. Available at SSRN: https://ssrn.com/abstract=2576666

Dimitrios Christelis (Contact Author)

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Dimitris Georgarakos

European Central Bank (ECB) - Directorate General Research ( email )

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Center for Financial Studies (CFS) ( email )

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University of Naples Federico II - Department of Economics ( email )

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