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Consumption responses to a large shock to financial wealth: evidence from Italy

Renata Bottazzi, Serena Trucchi and Matthew Wakefield

Economics Discussion Papers from University of Essex, Department of Economics

Abstract: We estimate marginal propensities to consume from wealth shocks for Italian households early in the Great Recession. Large asset-price shocks in 2007-2008 underpin instrumental variables. A euro fall in risky financial wealth resulted in cuts in annual total (non-durable) consumption of 8.5-9 (5.5-5.7) cents. We find small effects on food spending. Counterfactuals indicate financial-wealth effects were relatively important for consumption falls in Italy in 2007/08. The estimated effects are consistent with a simulated lifecycle model that captures the wealth shock. Also consistent with the model are findings of stronger wealth effects for agents who were pessimistic about stock returns.

Keywords: Wealth effects; household consumption; the Great Recession (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec
Date: 2017
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