CONSCRISIS · Households’ Consumption during the Great Recession: A structural analysis on the role of expectations
Horizon 2020 — Marie Skłodowska-Curie Actions
- Duration
- 2015-11-01 → 2017-10-31
- EU contribution
- €183,455
- Participants
- 1
- Scheme
- MSCA-IF-EF-ST
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Results in brief
Households’ Consumption during the Great Recession: A structural analysis on the role of expectations
Over the last ten years, several European countries have experienced two main episodes of slowdown in aggregate consumption. We observe a first contraction in aggregate consumption around 2008-2009, and a second one in 2011-2012. The goal of the main work, which I carried out within the CONSCRISIS project, is to investigate the role of income expectations in driving the contraction in household consumption observed during the two episodes. For this purpose, the work illustrates how the perceived degree of persistence in the income shock evolved over the recent crisis, and to which extent the shocks were different between the initial and the second phase. Moreover, it measures individual uncertainty about future income, which may strengthen the precautionary motive for savings. It also analyzes how perceptions about the persistence of income shocks and income uncertainty reflect into households' consumption expenditure. 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.
Data: CORDIS, © European Union
Project objective
A striking feature of the Great Recession is the fall in households’ expenditure and its slow recovery. The extraordinary duration of this contraction with respect to previous recessions stimulated the interest of scholars and policymakers in the analysis of its causes. In the early part of the crisis it is partly explained by a sudden crash in asset values. More recently, the decline in consumer confidence in several European countries is likely to have played a major role. This project aims to explore which factors explain why consumption has moved following the crisis and to assess the relevance of downwards revisions of income expectations.Households who experience a deep and prolonged period of economic downturn, such as the Great Recession, may become increasingly convinced about the permanence of income shocks over time. Gradual downwards revisions of expectations about permanent income are likely to lead to a series of downwards adjustments in consumption spending. This project will exploit a structural approach that will enable me to investigate the relevance for consumption of this process of adjustment.The contribution of this proposal is threefold. First, it improves the understanding of households’ consumption choices by analysing the role of income expectations. Second, it adds to the literature that investigates the determinants of the recession. The third contribution is methodological. An integral part of the project will be the elaboration and numerical solution of a lifecycle consumption-savings model with the novel feature that agents cannot (fully) observe the nature of the income shock and, thus, need time to learn about its permanence. The relevance of this proposal in a European perspective is enhanced by the cross-country perspective of the empirical analysis.The outstanding experts in Econometrics, Economics of Consumption and, more precisely, in the use of structural models, make UCL the perfect environment to carry out this project.
Original text from CORDIS.
Participants
- UNIVERSITY COLLEGE LONDON · LondonCoordinatorUnited Kingdom
Links
Data: CORDIS, © European Union