Heterogeneous response of consumers to income shocks throughout a financial assistance program

Fátima Cardoso, Manuel Pereira and Nuno Alves

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: This paper studies the impact on consumption of the large changes in public wages in Portugal arising in the context of the economic and financial assistance program (2011-2014). We uncover the effects of exogenous public wage changes by exploiting the heterogeneous characteristics of public servants by municipality. The initial wage cuts triggered a marked reduction of private consumption, while the reinstatements in the later years gave rise to an increase, albeit of a smaller magnitude. The consumption response was larger for employees with relatively lower wages. Households smoothed the impact on consumption of negative income shocks by drawing down their deposits. Consumer credit did not play such a role, as households deleveraged as a response to those negative shocks.

JEL-codes: E21 E62 E65 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cwa, nep-lab and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w202018

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