Household Inequality and the Consumption Response to Aggregate Real Shocks

28 Pages Posted: 6 Dec 2017

See all articles by Gene Amromin

Gene Amromin

Federal Reserve Bank of Chicago

Mariacristina De Nardi

University College London, Economics Dpt.; Federal Reserve Bank of Chicago; National Bureau of Economic Research (NBER) - Public Economics

Karl Schulze

Federal Reserve Bank of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: November 2017

Abstract

To what extent does household inequality affect the response of aggregate consumption to aggregate real shocks? We first review two state-of-the-art papers with household heterogeneity and aggregate uncertainty. They teach us that having a larger fraction of poor and borrowing constrained households, who have a high marginal propensity to consume, amplifies the drop in aggregate consumption in response to a negative aggregate real shock. We then move on to the Panel Study of Income Dynamics (PSID) and Equifax data to quantify the fraction of people that are constrained in their consumption choices and to study how that fraction has changed before and after the Great Recession. We argue that the role of constraints cannot be adequately captured by only having a large share of households with no wealth before a recession. We find that, for all of the measures that we consider, the fraction of households that are borrowing constrained has drastically increased since the onset of the Great Recession and that it has remained high, or even increased, all the way through 2012, the last year for which we currently have PSID data. Thus, it is not surprising that aggregate consumption has experienced such a large drop and remained depressed for a long time.

Suggested Citation

Amromin, Gene and De Nardi, Mariacristina and Schulze, Karl, Household Inequality and the Consumption Response to Aggregate Real Shocks (November 2017). NBER Working Paper No. w24073. Available at SSRN: https://ssrn.com/abstract=3082234

Gene Amromin (Contact Author)

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Mariacristina De Nardi

University College London, Economics Dpt. ( email )

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Karl Schulze

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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