Household Inequality and the Consumption Response to Aggregate Real Shocks

Gene Amromin, Mariacristina De Nardi and Karl Schulze

No 24073, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: To what extent does household inequality affect the response of aggregate consumption to aggregate real shocks? We first review two state-of-the-art papers with household heterogeneity and aggregate uncertainty. They teach us that having a larger fraction of poor and borrowing constrained households, who have a high marginal propensity to consume, amplifies the drop in aggregate consumption in response to a negative aggregate real shock. We then move on to the Panel Study of Income Dynamics (PSID) and Equifax data to quantify the fraction of people that are constrained in their consumption choices and to study how that fraction has changed before and after the Great Recession. We argue that the role of constraints cannot be adequately captured by only having a large share of households with no wealth before a recession. We find that, for all of the measures that we consider, the fraction of households that are borrowing constrained has drastically increased since the onset of the Great Recession and that it has remained high, or even increased, all the way through 2012, the last year for which we currently have PSID data. Thus, it is not surprising that aggregate consumption has experienced such a large drop and remained depressed for a long time.

JEL-codes: D15 E21 (search for similar items in EconPapers)
Date: 2017-11
New Economics Papers: this item is included in nep-mac
Note: PE
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Citations: View citations in EconPapers (5)

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Journal Article: Household Inequality and the Consumption Response to Aggregate Real Shocks (2018)
Working Paper: Household inequality and the consumption response to aggregate real shocks (2017)
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