Scarred Consumption

95 Pages Posted: 29 Jun 2020

See all articles by Ulrike Malmendier

Ulrike Malmendier

University of California, Berkeley - Department of Economics; University of California, Berkeley - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Leslie Sheng Shen

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: June 2020

Abstract

We show that economic downturns can "scar" consumers in the long-run. Having lived through times of high unemployment consumers remain pessimistic about the future financial situation and spend significantly less years later, controlling for income, wealth, and employment. Their actual future income is uncorrelated with past experiences. Due to experience-induced frugality, scarred consumers accumulate more wealth. Using a stochastic life-cycle model we show that the negative relationship between past downturns and consumption cannot arise from financial constraints, income scarring, or unemployment scarring. Our results suggest a novel micro-foundation of fluctuations in aggregate demand and imply long-run effects of macroeconomic shocks.

JEL Classification: D12, D83, D91, G51

Suggested Citation

Malmendier, Ulrike and Shen, Leslie Sheng, Scarred Consumption (June 2020). CEPR Discussion Paper No. DP14937, Available at SSRN: https://ssrn.com/abstract=3638041

Ulrike Malmendier (Contact Author)

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University of California, Berkeley - Haas School of Business ( email )

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Leslie Sheng Shen

Board of Governors of the Federal Reserve System ( email )

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