The Dynamics of Household Financial Fragility: Natural Disasters and Asymmetric Regime Transitions

Peter Grajzl and Benedikt Wick

No 12974, CESifo Working Paper Series from CESifo

Abstract: We develop a dynamic approach to household financial fragility, conceptualized as an unobserved latent state spanning objective precautionary liquidity and subjective appraisals of solvency and borrowing capacity. Using five waves (2021-2025) of the Federal Reserve's SHED and estimating a latent Markov model, we identify three fragility regimes — Secure, Coping, and Fragile—and trace transitions following natural disaster exposure. Disaster exposure exhibits an asymmetric relationship with financial deterioration: higher odds of downward transitions — Secure to Coping and Coping to Fragile — but no statistically detectable association with upward transitions. We find no evidence that race or gender moderates these dynamics, but age does. Relative to prime-age adults, younger adults show a bifurcated response: disaster exposure is linked to higher odds of both climbing to Secure and falling to Fragile from Coping. Older adults, by contrast, have elevated odds of falling from Coping to Fragile, without evidence of an offsetting recovery. Our framework highlights state-dependent, asymmetric transition dynamics and persistent financial scarring that remain invisible to conventional analyses.

Keywords: household financial fragility; natural disasters; latent Markov models; asymmetric regime transitions; life-cycle heterogeneity (search for similar items in EconPapers)
JEL-codes: D14 G41 G51 I31 Q54 (search for similar items in EconPapers)
Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.ifo.de/DocDL/cesifo1_wp12974.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12974

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().