Household Debt and Income Inequality, 1963–2003

I construct an economy with heterogeneous agents that mimics the time-series behavior of the earnings distribution in the United States from 1963 to 2003. Agents face aggregate and idiosyncratic shocks and accumulate real and financial assets. I estimate the shocks that drive the model using data on income inequality, aggregate income, and measures of financial liberalization. I show how the model economy can replicate two empirical facts: the trend and cyclical behavior of household debt and the diverging patterns in consumption and wealth inequality over time. While business cycle fluctuations can account for the short-run changes in household debt, its prolonged rise of the 1980s and the 1990s can be quantitatively explained only by the concurrent increase in income inequality.     

Contagion: Understanding How It Spreads

Much of the current debate on reforming the international financialarchitecture is aimed at reducing the risks of contagion—bestdefined as a significant increase in cross-market linkages aftera shock to an individual country (or group of countries). Thisdefinition highlights the importance of other links throughwhich shocks are normally transmitted, including trade and finance.During times of crisis, the ways in which shocks are transmitteddo seem to differ, and these differences appear to be important.Empirical work has helped to identify the types of links andother macroeconomic conditions that can make a country vulnerableto contagion during crisis periods, although less is known aboutthe importance of microeconomic considerations and institutionalfactors in propagating shocks. Empirical research has helpedto identify those countries that are at risk of contagion aswell as some, albeit quite general, policy interventions thatcan reduce risks.      

Are Remittances Insurance? Evidence from Rainfall Shocks in the Philippines

Do remittances sent by overseas migrants serve as insurancefor recipient households? In a study of how remittances fromoverseas respond to income shocks experienced by Philippinehouseholds, changes in income are found to lead to changes inremittances in the opposite direction, consistent with an insurancemotivation. Roughly 60 percent of declines in household incomeare replaced by remittance inflows from overseas. Because householdincome and remittances are jointly determined, rainfall shocksare used as instrumental variables for income changes. The hypothesiscannot be rejected that consumption in households with migrantmembers is unchanged in response to income shocks, whereas consumptionresponds strongly to income shocks in households without migrants.     

Exploring household financial strain dynamics

Rising energy and food prices are causing living standards to fall across Europe and straining household budgets. The longer-term outlook for households is unclear as the dynamics of financial strain are not well understood. We address four important research questions on financial strain dynamics by applying a dynamic random coefficients probit model with duration and occurrence dependence to De Nederlandsche Bank (DNB) Household Survey panel data. We find no evidence that households become habituated or sensitised to financial strain over time unlike in studies of responses to stress. Entry into household financial strain is less likely when the household can cope by increasing earnings from work or by borrowing from family and friends but not by the economically inactive entering employment. Our third result is that the persistence of financial strain can be explained by a mutually-enforcing negative cycle through worse health but not through marital conflict or more short-sighted and risk averse decision-making. Finally, we find that neither income or wealth shocks affect financial strain in contrast to other studies. Further research into understanding the experience of financial hardship is warranted in the light of the economic challenges caused by the current cost of living crisis.     

Consumption smoothing and portfolio rebalancing: The effects of adjustment costs

A household's response to income and return shocks depends on the costs of portfolio adjustment. In particular, the extent of portfolio rebalancing and consumption smoothing are influenced by the presence of non-convex portfolio adjustment costs. Suppose bonds can be adjusted costlessly while adjustments to stock accounts entail adjustment costs. Due to these portfolio adjustment costs, the household demands both stocks and bonds. A household can buffer some income fluctuations without incurring adjustment costs and engage in costly portfolio rebalancing less frequently. Using the estimated preference parameters and portfolio adjustment costs, the response to income and return shocks is nonlinear and reflects the interaction of portfolio rebalancing and consumption smoothing.     

COVID-19 and Ethnic Inequalities in England and Wales*

The economic and public health crisis created by the COVID-19 pandemic has exposed existing inequalities between ethnic groups in England and Wales, as well as creating new ones. We draw on current mortality and case data, alongside pre-crisis labour force data, to investigate the relative vulnerability of different ethnic groups to adverse health and economic impacts. After accounting for differences in population structure and regional concentration, we show that most minority groups suffered excess mortality compared with the white British majority group. Differences in underlying health conditions such as diabetes may play a role; so too may occupational exposure to the virus, given the very different labour market profiles of ethnic groups. Distinctive patterns of occupational concentration also highlight the vulnerability of some groups to the economic consequences of social distancing measures, with Bangladeshi and Pakistani men particularly likely to be employed in occupations directly affected by the UK's ‘lockdown’. We show that differences in household structures and inequalities in access to savings mean that a number of minority groups are also less able to weather short-term shocks to their income. Documenting these immediate consequences of the crisis reveals the potential for inequalities to become entrenched in the longer term.     

Stock returns’ sensitivities to crisis shocks: Evidence from developed and emerging markets

We consider three “crisis shocks” related to key features of the 2007–2008 crisis, for emerging and developed economies: (1) the collapse of global trade, (2) the contraction of credit supply, and (3) selling pressure on firms’ equity. Using an international cross-section of firms, we find that returns’ sensitivities to these shocks imply large and statistically significant influences on residual equity returns during the crisis period (after controlling for normal risk factors that are associated with expected returns). Similar analysis for several placebo periods shows that these effects are generally less severe or absent in non-crisis periods. Relative to developed economies, emerging markets are more responsive to global trade conditions (in crisis and in placebo periods), but less responsive to selling pressures. An analysis of portfolios of firms during various placebo periods indicates that investors are not compensated for the risks associated with the crisis shocks. Finally, a month-by-month analysis of returns during the crisis period shows that the time variation of the importance of each of the sensitivities to shocks tracks related changes in the global economic environment.     

Modelling the Distributional Impact of the COVID-19 Crisis*

The COVID-19 emergency has had a dramatic impact on market incomes and income-support policies. The lack of timely available data constrains the estimation of the scale and direction of recent changes in the income distribution, which in turn constrains policymakers seeking to monitor such developments. We overcome the lack of data by proposing a dynamic calibrated microsimulation approach to generate counterfactual income distributions as a function of more timely external data than are available in dated income surveys. We combine nowcasting methods using publicly available data and a household income generation model to perform the first calibrated simulation based upon actual data, aiming to assess the distributional implications of the COVID-19 crisis in Ireland. Overall, we find that the crisis had an equalizing real-time effect for both gross and disposable incomes, notwithstanding the significant hardship experienced by many households.     

Understanding Society: the income data

We introduce the income data of Understanding Society, the UK Household Longitudinal Study. First, we show that the data are widely used in academic and policy research. We then discuss the pros and cons of different types of data on household incomes. We go on to describe the income content of Understanding Society, emphasising key details of data collection and data processing – specifically the derivation of net household income totals. We perform a quality assessment that compares Understanding Society estimates of net household incomes to those from a reliable cross-sectional source – the Households Below Average Income series. We conclude that the Understanding Society income data are of high quality, and so are an excellent source for research on the income distribution or incomes more generally. We finish with a discussion of future directions for income data collection in the study.     

What changes energy consumption? Prices and public pressures

Policymakers often seek to limit energy prices following market shocks, and instead issue public appeals to reduce demand. This article presents new evidence on how price changes and conservation appeals affect energy consumption, using household‐level data from California's energy crisis during 2000 and 2001. The evidence indicates that when policymakers cap energy prices following market shocks, they preclude substantial—and quite rapid—reductions in energy use. The data also reveal that conservation appeals and informational programs can produce sustained reductions in energy demand.     

Residential Mobility Decisions in Japan: Effects of Housing Equity Constraints and Income Shocks under the Recourse Loan System

This paper draws on six waves of Japanese household longitudinal data (Keio Household Panel Survey, KHPS) and estimates a conditional fixed effects logit model to investigate the effects of housing equity constraints and income shocks on own-to-own residential moves in Japan. By looking at contemporaneous extended Loan-to-Value (ELTV) and extended Debt-to-Income (EDTI) ratios under the recourse loan system, we examine whether housing equity constraints and negative income shocks have any impact on own-to-own residential moves. Taking account of the specific nature of the recourse loan system in Japan, we further investigate whether these effects are different between positive and negative equity households. The estimation results show that housing equity constraints and negative income shocks significantly deter own-to-own residential moves for positive equity households.     

International income risk-sharing and the global financial crisis of 2008–2009

We examine the impact of the global financial crisis on the degree of international income and consumption risk-sharing among industrial economies using returns on cross-border portfolio holdings (e.g., debt, equity, FDI). We split the returns from the net foreign holdings as receipts (inflows) and payments (outflows) to investigate which of the two sides exhibited the greater resilience for income risk-sharing during the recent crisis. First, we find that debt delivered better risk-sharing than equity, mainly reflecting the deficit deterioration in EMU countries during the post-crisis period. FDI, by contrast, did not correspond to noticeable risk diversification. Second, separating output shocks into positive and negative components reveals that debt holding receipts (equity liability payments) performed better under negative (positive) realizations of the shock variable. Third, the unwinding of capital flows resulted in a sharp fall in income dis-smoothing via the debt liability channel in the new EU countries.     

The Effects of Oil Supply and Demand Shocks on U.S. Consumer Sentiment

This paper investigates how the University of Michigan's Index of Consumer Sentiment responds to oil price shocks. While oil supply shocks play only a limited role, the effect of aggregate demand shocks is positive for the first few months and negative thereafter. A typical other oil demand shock has a significant negative impact for up to 2 years. By studying the responses of individual survey questions, we find that expectations of future inflation and a change in real household income as well as perceived vehicle and house buying conditions are the main transmission channels of oil supply and demand shocks.     

原油价格与经济政策不确定性对大宗商品市场非对称冲击效应研究

利用面板分位回归模型,考量不同市场环境下原油价格与经济政策不确定性对大宗商品市场非对称性冲击效应。结果表明：油价冲击对中国大宗商品收益的影响具有非对称性,正负油价冲击对其均有促进作用,但随着市场环境好转,正油价冲击的作用逐渐增强,负油价冲击则逐渐减弱;政策不确定性对大宗商品收益有促进作用,但在牛市环境下有抑制作用;且危机前后,油价冲击对大宗商品收益的影响存在非对称性效应。     

信贷增长如何影响中国的收入和财富不平等

本文基于中国家庭追踪调查(CFPS)数据考察了信贷增长对中国家庭收入和财富不平等的影响。整体而言，信贷增长可以缩小家庭收入不平等，主要作用机制是信贷增长通过提高中低收入群体的劳动收入和单位时薪以缩小劳动收入不平等。同时，文献中所发现的信贷增长可能恶化收入不平等的机制——扩大家庭间非货币金融资产差距，在我国表现并不明显，原因在于中国家庭的非货币金融资产比例较低，这一点对于高收入家庭也不例外，且大部分家庭难以从金融资产交易中获利。信贷增长带来了各个收入组的房屋价值上涨，但高收入家庭房产价值上涨的幅度高于中低收入家庭，因此房价上涨扩大了不同收入家庭所持有的房产价值差异。考虑到家庭调查数据往往对高收入家庭的收入和财产覆盖不完整，上述结论可能低估了信贷增长对极少数高收入家庭收入和资产的影响。本文有助于更好地理解我国信贷增长对收入分配问题的影响，为相关政策制定提供了一定启示。     

Weathering the Storm: The Impact of the East Asian Crisis on Farm Households in Indonesia and Thailand

This article assesses the impact of the East Asian financialcrisis on farm households in two of the region's most affectedcountries. Indonesia and Thailand, using detailed household-levelsurvey data collected before and after the crisis began. Althoughthe nature of the shocks in the two countries were similar,the impact on farmers' income (particularly on distribution)was quite different. In Thailand, poor farmers bore the bruntof the crisis, in part because of their greater reliance onthe urban economy, than did poor farmers in Indonesia. Urban-rurallinks are much weaker in Indonesia. Farmers in both countries,particularly those specializing in export crops, benefited fromthe currency devaluation. Although there is some evidence thatthe productivity of the smallest landholders declined over theperiod in question, it is difficult to attribute this directlyto the financial crisis. At least in Thailand, a rural creditcrunch does not seem to have materialized.      

Income dispersion and counter-cyclical markups

Recent advances in measuring cyclical changes in the income distribution raise new questions: How might these distributional changes affect the business cycle itself? We show how counter-cyclical income dispersion can generate counter-cyclical markups in the goods market, without any preference shocks or price-setting frictions. In recessions, idiosyncratic labor productivity shocks raise income dispersion, lower the price elasticity of demand, and increase imperfectly competitive firms’ optimal markups. The calibrated model explains not only many cyclical features of markups, but also cyclical and long-run patterns of standard business cycle aggregates.     

The role of household and business credit in banking crises

Private credit expansions are an important predictor of subsequent banking crises. We revisit that result with a new dataset from developed and developing countries that decomposes private credit into household credit and enterprise credit. We argue that household credit growth raises debt levels without much effect on long-term income. Rapid household credit expansions generate vulnerabilities that can precipitate a banking crisis. Enterprise credit expansions can have the same effects but it is tempered by the associated increase in income. Our estimates show that household credit expansions have been a statistically and economically significant predictor of banking crises. Enterprise credit expansions are also associated with banking crises but their effect is weaker and less robust.     

Aggregate Implications of Heterogeneous Households in a Sticky‐Price Model

This paper analyzes the role of heterogeneous households in propagating shocks over the business cycle by generalizing a basic sticky‐price model to allow for imperfect risk sharing between households that differ in labor incomes. I show that imperfectly insured household consumption distorts household incentive to supply labor hours through an idiosyncratic income effect, which in turn generates strategic complementarities in price setting and thus amplifies business cycle fluctuations. This mechanism diminishes the role of nominal rigidities and makes sticky‐price models more consistent with microeconomic evidence on the frequency of price changes.     

Misclassification of the dependent variable in a debt–repayment behavior context

This paper estimates a model of the household debt–repayment decision that accounts for the possibility of misclassification of self-reported debt–repayment status. It likewise estimates the extent of misclassification in a sample of data from different European countries. The evidence suggests that many households that are in arrears do not report this condition, so that the true level of arrears is, on average, 24% higher than that observed in our data. Furthermore, the effects on the incidence of arrears of adverse income and expense shocks are substantially greater than those predicted by estimators that ignore the possibility of misclassification.