Working Paper: CEPR ID: DP14937
Authors: Ulrike M. Malmendier; Leslie Sheng Shen
Abstract: We show that economic downturns can "scar" consumers in the long-run. Having lived through times of high unemployment consumers remain pessimistic about the future financial situation and spend significantly less years later, controlling for income, wealth, and employment. Their actual future income is uncorrelated with past experiences. Due to experience-induced frugality, scarred consumers accumulate more wealth. Using a stochastic life-cycle model we show that the negative relationship between past downturns and consumption cannot arise from financial constraints, income scarring, or unemployment scarring. Our results suggest a novel micro-foundation of fluctuations in aggregate demand and imply long-run effects of macroeconomic shocks.
Keywords: No keywords provided
JEL Codes: D12; D83; D91; G51
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Past unemployment experiences (J65) | Consumer beliefs about future financial conditions (G59) |
| Past unemployment experiences (J65) | Current beliefs about financial prospects (E66) |
| Past experiences of high unemployment (J64) | Current consumption (E21) |
| Past experiences of high unemployment (J64) | Wealth accumulation (E21) |
| Past experiences (C92) | Future income (J17) |