Evolution of Consumption Volatility for the Liquidity Constrained Households over 1983 to 2004

Olga Gorbachev and Keshav Dogra

Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh

Abstract: We study whether the increased income uncertainty in the US over the last quarter-century had a negative impact on household welfare by looking at variability of household consumption growth. We are particularly interested in understanding the effect of greater uncertainty on the liquidity constrained households. We study the evolution of liquidity constraints in the US in the Panel Study of Income Dynamics, greatly extending Jappelli et al. [1998] methodology on how to construct such measures using information from the Survey of Consumer Finances. We find that although household indebtedness increased substantially, reflecting greater availability of credit, there was no decline in the proportion of liquidity constrained households between 1983 and 2007. Applying methodology developed in Gorbachev [2009], we find that the evolution of consumption volatility for the liquidity constrained households increased by economically and statistically more than for the unconstrained households. This increase was lower than that of family income volatility for these groups. Nevertheless, the welfare cost to society is substantial: we estimate that an average household would be willing to sacrifice 2.35 percent of nondurable consumption per year to lower consumption risk to its 1984 levels.

Pages: 47
Date: 2009-11
New Economics Papers: this item is included in nep-ban and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.econ.ed.ac.uk/papers/id193_esedps.pdf

Related works:
Working Paper: Evolution of Consumption Volatility for the Liquidity Constrained Households over 1983 to 2004 (2010)
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:edn:esedps:193

Access Statistics for this paper

More papers in Edinburgh School of Economics Discussion Paper Series from Edinburgh School of Economics, University of Edinburgh 31 Buccleuch Place, EH8 9JT, Edinburgh. Contact information at EDIRC.
Bibliographic data for series maintained by Research Office ().