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Households’ Consumption during the Great Recession: A structural analysis on the role of expectations

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An innovative analysis on consumption during the Great Recession

To better understand the Great Recession’s effect on household consumption expenditure, researchers with the EU-funded CONSCRISIS project focused their attention on the impact of wealth shocks.


A striking feature of the Great Recession was the fall in – and slow recovery of – household expenditures. The extraordinary duration of this contraction with respect to previous recessions stimulated the interest of scholars and policymakers, including those with the EU-funded CONSCRISIS project. “Over the last ten years, several European countries have experienced two important episodes of slowdown in aggregate consumption, the first happening around 2008-2009 and the second in 2011-2012,” says project researcher Serena Trucchi. “The main goal of this research was to examine the causes of these extraordinary drops in household consumption expenditure.” The study focused on the role of household expectations regarding income and the perceived or real persistence of income shocks. By analysing the impact of wealth shocks on both consumption and labour supply, researchers also contributed to our understanding of household behaviour during the Great Recession. “Our results have added to the economic literature on consumption and savings,” adds Trucchi. “They also have relevant policy implications, particularly as to contraction in aggregate consumption during the recent financial crisis.” Household expectations and the persistence of income shocks The bulk of the CONSCRISIS research was dedicated to investigating the role of subjective income expectations and uncertainty in driving the contraction in household consumption that happened during the recent crisis. The results show a change in the perception of the persistence of income shocks during the recession. “Between 2008-09, the negative shock was perceived to be transitory, while in the second economic downfall respondents revised their expectations about permanent income shocks downward,” explains Trucchi. “Furthermore, permanent shocks in the second phase of the recession were perceived to be larger by younger cohorts.” Researchers also observed an increase in the variance of expected income shocks since 2011, with preliminary results showing a response of consumption to permanent and transitory income shocks. Wealth effects on consumption and labour supply Along with this core research, CONSCRISIS also analysed other aspects of household behaviour, including the impact of wealth shocks on household consumption. Using an Italian micro-dataset and the instrumental variable strategy, the study estimated marginal propensities for households to consume from wealth shocks early in the Great Recession. “Counterfactuals indicate financial-wealth effects were relatively important for consumption falls, at least in Italy, in 2007 and 2008,” says Trucchi. Researchers also looked at whether or not individuals adjust their labour supply when faced with wealth shocks. “Shocks to asset prices provide a source of exogenous variation to identify the effect of financial losses during the post 2007 financial crisis, and throw this question into sharper focus,” adds Trucchi. “The results point to significant effects of wealth on hours of work and on whether or not agents leave their jobs.” Trucchi notes that the magnitude of these effects can be substantial on, for example, those individuals who suffered larger wealth losses during the financial crisis. Explaining consumption trends Although the project focused on two European countries, namely the Netherlands and Italy, it sheds light on widespread facts – all of which are relevant to explaining consumption trends in several European countries in the recent past. “We think the project produced some innovative analysis on consumption and, in particular, on the role played by subjective expectations,” concludes Trucchi. Next steps include the publication of articles in academic journals and further dissemination of the project’s findings at academic and policy conferences.


CONSCRISIS, Great Recession, wealth shocks, household consumption, European Union, EU

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