Pandemic Shocks and Household Spending

David Finck and Peter Tillmann
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David Finck: Justus Liebig University Gießen
Peter Tillmann: Justus Liebig University Gießen

No GRU_2020_021, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: We study the response of daily household spending to the unexpected component of the COVID-19 pandemic, which we label as pandemic shock. Based on daily forecasts of the number of fatalities, we construct the surprise component as the difference between the actual and the expected number of deaths. We allow for state-dependent effects of the shock depending on the position on the curve of infections. Spending falls after the shock and is particularly sensitive to the shock when the number of new infections is strongly increasing. If the number of infections grows moderately, the drop in spending is smaller. We also estimate the effect of the shock across income quartiles. In each state, low-income households exhibit a significantly larger drop in consumption than high-income households. Thus, consumption inequality increase after a pandemic shock. Our results hold for the US economy and the key US states. The findings remain unchanged if we choose alternative state-variables to separate regimes.

Keywords: COVID-19; pandemic; consumption; smooth-transition model; state-dependence (search for similar items in EconPapers)
JEL-codes: E21 E32 I10 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2020-08-19
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Persistent link: https://EconPapers.repec.org/RePEc:cth:wpaper:gru_2020_021

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