The effect of the financial crisis on the retirement plans of older workers in England

This letter revisits the question of how wealth shocks influence retirement behaviour, exploiting the dramatic changes in UK asset prices between 2008 and 2009 as a source of such shocks. We find no evidence that the wealth shocks arising from this recent financial crisis affected the retirement plans of older workers in England.     

Consumption smoothing and income redistribution

We show theoretically that income redistribution benefits borrowing-constrained individuals more than is implied by standard relative-income and uninsurable-risk considerations. Empirically, we find in international opinion-survey data that younger and lower-income individuals express stronger support for government redistribution in countries where consumer credit is less easily available. This evidence supports our theoretical perspective if such individuals are more strongly affected by tighter credit supply, in that expectations of higher incomes in the future increase their propensity to borrow.     

Child Benefit Payments and Household Wealth Accumulation

Using the life‐cycle/permanent income hypothesis, we theoretically and empirically assess the impact of child benefit payments on household wealth accumulation. Consistent with the predictions of the model, we find that higher cumulative benefits received increase current assets, higher future benefit payments lower asset holding, and that these effects systematically vary over the life cycle. We find different wealth responses to child benefit payments for liquidity constrained and unconstrained households, as predicted by the model.     

How do consumers respond to house price declines?

Movements in house prices and consumer spending are closely correlated in many developed nations. Much debate exists on whether this relationship is causal arising from either wealth effects or via borrowing constraints. This paper uses a unique survey question on consumer responses to house price falls to explain the relationship between house price movements and consumer spending among households in the United Kingdom. 30% of households report they would cut back consumption as a direct response to house price falls. Households who reported they were borrowing constrained were much more likely to report they would cut consumption.     

Income inequality, consumption, and social-status seeking

Using the Chinese Urban Household Survey data between 1997 and 2006, we find that income inequality has a negative (positive) effect on household consumption net of education expenditures (savings) even after we control for household income. We argue that people save to improve their social status when social status is associated with pecuniary and non-pecuniary benefits. Rising income inequality can strengthen the incentives of status-seeking savings by increasing the benefit of improving status, and by enlarging the wealth level required for status upgrading. We also find that the negative effect of income inequality on consumption is stronger for poorer and younger people and that income inequality stimulates more education investment, which are consistent with the status-seeking hypothesis.     

Why Do the Rich Save More? A Theory and Australian Evidence*

We provide a theory to explain the existence of inequality in an economy where agents have identical preferences and have access to the same production technology. Agents consume a ‘health’ good which determines their subjective discount factor. Depending on initial distribution of capital the economy gets separated into different permanent‐income groups. This leads to a testable hypothesis: ‘The rich save a larger proportion of their permanent‐income’. We test this implication for savings behaviour in Australia. We find that even after controlling for lifecycle and health characteristics, higher permanent income is positively related with higher savings rates and better saving habits.     

Moving costs, nondurable consumption and portfolio choice

The substantial adjustment cost for housing affects nondurable consumption and portfolio allocations, as well as the frequency of housing transactions. A simple theoretical model, roughly calibrated, is used to assess the quantitative impact of adjustment costs on those decisions. The impact on portfolios is found to be significant, suggesting that housing wealth should be useful in empirical studies of portfolio choice. The welfare loss from the transaction cost is also substantial. The effect on nondurable consumption is small, however, so adjustment costs can explain only a small part of the equity premium puzzle.     

Saving rates and portfolio choice with subsistence consumption

We analytically show that a common across rich/poor individuals Stone-Geary utility function with subsistence consumption in the context of a simple two-asset portfolio-choice model is capable of qualitatively and quantitatively explaining: (i) the higher saving rates of the rich, (ii) the higher fraction of personal wealth held in risky assets by the rich, and (iii) the higher volatility of consumption of the wealthier. On the contrary, time-variant “keeping-up-with-the-Joneses” weighted average consumption which plays the role of moving benchmark subsistence consumption gives the same portfolio composition and saving rates across the rich and the poor, failing to reconcile the model with what micro data say.     

Deleveraging in a Highly Indebted Property Market: Who does it and are there Implications for Household Consumption?

A distinguishing feature of the period preceding the 2007/2008 financial crisis was the sizeable increase in private sector debt observed across many countries. A key component of household liabilities is mortgage debt and with many countries experiencing persistent increases in house prices from the mid‐1990s, a marked increase in this aspect of household leverage was observed. While aggregate statistics across countries confirm reductions in personal debt levels in recent years, relatively few sources of micro data are available to examine the nature of the deleveraging process at the household level. In this paper, using a unique dataset, we examine deleveraging amongst a representative sample of mortgaged Irish households. We identify the characteristics of households engaged in deleveraging and find that it is those households who can afford to deleverage who do. Furthermore we find some tentative evidence to suggest that the decision to deleverage has negative implications for household consumption.     

Incomplete markets,liquidation risk,and the term structure of interest rates

We analyse the term structure of interest rates in a general equilibrium model with incomplete markets, borrowing constraint, and positive net supply of government bonds. Uninsured idiosyncratic shocks generate bond trades, while aggregate shocks cause fluctuations in the trading price of bonds. Long bonds command a “liquidation risk premium” over short bonds, because they may have to be liquidated before maturity – following a bad idiosyncratic shock – precisely when their resale value is low – due to the simultaneous occurrence of a bad aggregate shock. Our framework endogenously generates limited cross-sectional wealth heterogeneity among the agents (despite the presence of uninsured idiosyncratic shocks), which allows us to characterise analytically the shape of the entire yield curve, including the yields on bonds of arbitrarily long maturities. Agents? desire to hedge the idiosyncratic risk together with their fear of having to liquidate long bonds at unfavourable terms implies that a greater bond supply raises the level of the yield curve, while an increase in the relative supply of long bonds raises its slope.     

A refined consumption-wealth ratio and its role on time-varying consumption risk

This paper takes a deeper look at the measurement of the consumption-wealth ratio and analyzes its ability to capture variations in expected future stock returns. I find evidence of stock return predictability by taking a different approach than predictive regressions.     

Over-savings and hyperbolic discounting

Hyperbolic discounting models are widely seen as implying that consumers do not save enough, in accordance with the observed low rates of savings of some households. This paper qualifies this view by showing that hyperbolic consumers may ‘oversave’ in the short run. The result extends to uncertainty on future income and does not depend on whether preferences are present-biased or future-biased. A generalized comparative statics analysis of self-control is introduced, and its relationship to the analysis of uncertainty on discount factors is emphasized.     

Housing and relative risk aversion

This paper derives closed-form and numerical solutions for relative risk aversion in a standard consumption-based model enriched with housing. The presence of housing enables the household to hedge against unexpected shocks and may decrease relative risk aversion. In addition, housing may generate state-dependent, time-varying risk aversion.