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

Author(s): Dimitris Christelis, Dimitris Georgarakos and Tullio Jappelli

Publication Date: October 2014

Keyword(s): consumption, great recession, unemployment and wealth shocks

Programme Area(s): International Macroeconomics

Abstract: We 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 US. We find that many households experienced large capital losses in housing and in their financial portfolios, and that a non-trivial fraction of respondents have lost their job. As a consequence of these shocks, many households reduced substantially their expenditures. We estimate that the marginal propensities to consume with respect to housing and financial wealth are 1 and 3.3 percentage points, respectively. In addition, those who became unemployed reduced spending by 10 percent. 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.

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Bibliographic Reference

Christelis, D, Georgarakos, D and Jappelli, T. 2014. 'Wealth Shocks, Unemployment Shocks and Consumption in the Wake of the Great Recession'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10196