Working Paper: NBER ID: w24073
Authors: Gene Amromin; Mariacristina De Nardi; Karl Schulze
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.
Keywords: Household Inequality; Consumption Response; Aggregate Real Shocks
JEL Codes: D15; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher proportion of borrowing constrained households (G51) | More significant decline in aggregate consumption (E21) |
| Poor households with high marginal propensity to consume (D12) | More sensitive consumption expenditures to changes in income and wealth (D12) |
| Tightening of credit conditions during the Great Recession (F65) | Exacerbation of drop in consumption (E21) |
| Enduring nature of borrowing constraints (G51) | Persistence of low consumption levels post-recession (E21) |
| Negative shifts in wealth distribution (D31) | Persistence of low consumption levels post-recession (E21) |
| Changes in earnings risk during the recession (J39) | Greater likelihood of consumption reductions among lower wealth households (D12) |
| Wealth distribution and asset composition (D31) | Extent of borrowing constraints (F34) |
| Dynamics of wealth losses, credit accessibility, and changes in earnings risk (G51) | Consumption response (D12) |