Consumption Responses to a Large Shock to Financial Wealth: Evidence from Italy |
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Authors: | Renata Bottazzi Serena Trucchi Matthew Wakefield |
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Institution: | 1. University of Bologna, 40126 Bologna, Italy;2. Ca′ Foscari University of Venice, 30121 Venice, Italy |
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Abstract: | We estimate marginal propensities to consume from wealth shocks. We exploit large asset-price shocks in 2007–2008 and household-level panel data to implement instrumental variables. A fall of one euro in risky financial wealth resulted in cuts to annual total (non-durable) consumption of 8.5–9 (5.5–5.7) cents, with small effects on food spending. Effects seem stronger for lower-wealth or indebted households, but significant responses from wealthier households and those without mortgages are important for our baseline results. Counterfactuals indicate financial-wealth effects were relatively important for consumption falls in Italy in 2007–2008. The estimated effects are consistent with a simulated life-cycle model capturing the wealth shock. |
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Keywords: | Household consumption marginal propensity to consume the Great Recession wealth effects |
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