Periodic Reporting for period 1 - CONSCRISIS (Households’ Consumption during the Great Recession: A structural analysis on the role of expectations)
Reporting period: 2015-11-01 to 2017-10-31
Along with this core issue, I illustrate the impact of wealth shocks on consumption and labour supply during the Great Recession. I also examined household consumption, wealth accumulation and labour supply from different perspectives.
Given the topical subject, investigating the determinants of the economic crisis contributes to the scientific literature on households’ consumption and saving choices, and informs the economic and policy debate in Europe. This study provides policymakers with a useful tool to understand households’ choices and, thus, implement effective interventions in sustaining consumption and hampering the recession.
The main findings show a change in the perception of the persistence of income shocks between the two phases of the recession. Between 2008-09, the negative shock is perceived to be transitory, while in the second economic downfall (2012-13), respondents revise downward their expectations about permanent income shocks. Permanent shocks in the second phase of the recession are perceived to be larger by younger cohorts. Finally, we observe an increase in the variance of expected income shocks since 2011. I find a response of consumption to permanent and transitory income shocks.
During the Marie Skłodowska-Curie fellowship, I also contributed to the investigation of household behaviour during the Great Recession by analysing the impact of wealth shocks on consumption and labor supply.
Results from my research show that one euro fall in risky financial wealth resulted in cuts in annual total (non-durable) consumption of 8.5-9 (5.5-5.7) cents. Counterfactuals indicate financial-wealth effects were relatively important for consumption falls in Italy in 2007/08. I show that the estimated propensity for total consumption to respond to the negative wealth shock is consistent with the predictions of a dynamic-stochastic lifecycle model. This model is carefully constructed to capture features of the period, notably including the possibility of large wealth shocks in the stochastic process for returns to financial assets. Also consistent with the model, the results show stronger wealth effects for agents who were pessimistic about stock returns. Finally, my results point to noticeable effects on the labour supply behaviour of those who suffered larger shocks.
The Marie Skłodowska-Curie fellowship also gave me the opportunity to complete other works on individual and household choices within the life-cycle.
I disseminated the results of my research to the scientific community through articles, published or submitted to top journals, and working papers. I also presented the outcomes of my scientific activity at seminars in several European Universities and international conferences: Seminar at Leiden University (Invited); Seminar at University of Economics, Prague (Invited); Seminar at Birkbeck University of London (Invited); UCL, Applied Brown Bag Seminar; Seminar at Ca’ Foscari University of Venice (Invited); Seventh Italian Congress of Econometrics and Empirical Economics (ICEEE), Messina; 63rd Economic Policy Panel Meeting, Amsterdam; Journées Louis-André Gérard-Varet, Aix-en-Provence.
Moreover, I examined other aspects of households’ consumption and labor supply during the Great Recession. These results further contribute to the understanding of individual and household behavior in recession periods.
The analysis I carried out during the MSCA fellowship has relevant policy implications and offer an instrument in the hand of policymakers to understand some aspects of the recent economic and financial crisis. Given the topical subject, investigating the determinants of the economic crisis contributes to inform the economic and policy debate in Europe. The studies I implemented provide policymakers with a useful tool to understand households’ choices and, thus, implement effective interventions in sustaining consumption and hampering economic downturns.
Finally, the Marie Skłodowska-Curie fellowship allowed me to consolidate my knowledge, to acquire new skills, to consolidate my professional maturity and to attain an independent position as a researcher. I strengthened my international networking, by interacting with outstanding scholars and by starting new collaborations with other research in European Universities (e.g. University of Oxford), which are the basis for long-term international collaborations.