Heterogeneity in household consumption behavior: The role of inequality and financial instability

Juan Laborda and Cristina Suarez
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Juan Laborda: Universidad Politécnica de Madrid

Journal of Evolutionary Economics, 2024, vol. 34, issue 1, No 3, 63-88

Abstract: Abstract We analyze, using the micro data of the Household Financial Survey (HFS) of the Bank of Spain, the consumption consequences of the household balance sheets and debt accumulation during the real estate bubble of 2002–2005, the Great Recession (2008–2011) and the subsequent economic recovery phase (2014–2017). Using quantile regression models, we find heterogeneity in household consumption behavior with respect to income and net worth levels, and in response to changes in household net worth in the last two periods. During the considered real estate bubble period, this heterogeneity in behavior is diminished, and only occurs in relation to the level of net wealth, in line with Hyman Minsky’s Paradox of Tranquility. These findings favor the post-Keynesian theory on consumption. The greater inequality leads to a higher propensity of certain households to consume in response to changes in housing and financial net worth. This is compatible with the relative income hypothesis extended in expenditure cascades models. Otherwise, households will be willing to take on more risk during economic boom periods associated with a real estate bubble, which translates into debt-financed consumption that virtually makes such heterogeneity practically disappear.

Keywords: Consumption; Household debt; Inequality; Financial instability; Great Recession; Quantile regression models (search for similar items in EconPapers)
JEL-codes: C22 D31 E01 E12 E21 E32 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s00191-024-00853-x

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