consumption smoothing and income redistribution abstract 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

the impact of house prices on consumption in the uk a new perspective this paper proposes an alternative approach to the question of how house prices influence household consumption by focusing on their impact on mortgage equity withdrawal and household saving household level data are used to derive a measure of expected and unexpected changes in house prices these are then incorporated into a recursive bivariate probit model of the decision to withdraw housing equity and save the results suggest that households respond to changes in their housing wealth primarily by increasing their mortgage borrowing rather than by decreasing their savings although this is mainly for younger households however while changes in housing wealth do not have a direct impact on household saving they do have an important indirect impact since they increase the likelihood that the household will withdraw equity which in turn has a negative impact on household saving

boom in bust out young households and the housing price cycle abstract the uk experienced a major residential real estate boom bust cycle from the mid 1980s to the mid 1990s accompanied by unprecedented shifts in the owner occupancy rate of young households previous empirical analyses have pointed toward income changes and financial deregulation as the likely causes of this episode with little to say about the differential effects on various age groups we show that in a life cycle model with income heterogeneity and credit constraints the observed co movements of housing prices and owner occupancy rates can be explained as an equilibrium response to income and credit market shocks our findings suggest that the financial liberalisation of the early 1980s was crucial for the unparalleled increase in the owner occupancy rate of young households during the boom

trends in household saving don t justify tax incentives to boost saving despite diverse trends in household saving in oecd countries many governments are introducing tax incentives designed to boost saving by particular groups such schemes have been justified by many trends including increasing income inequality ageing populations and greater cross border competition it is dangerous however to base policy on what is happening to aggregate household saving alone first personal saving should be viewed within a lifecycle context saving may look inadequate today but households may already have made plans to redress this in future second data on aggregate saving conceal significant differences between different household groups only disaggregation yields reliable inferences on which policy can be based in particular it is impossible to assess the consequences of demographic changes without analysis that distinguishes between different generations we reassess household saving by computing the evolution of lifetime profiles of consumption income and saving of different cohorts over time and then analyse the effect of demographic and other changes we find little evidence for the assertion that tax incentives to promote national saving are needed now to stave off a future drought in household saving

do tax incentives for saving in pension accounts cause debt accumulation evidence from danish register data abstract this paper applies a quasi experimental research design on a danish 2010 policy that reduced tax incentives for saving in annuity pension schemes to show significant substitution of savings from retirement accounts to gross debt repayments we find that for every 1 danish currency unit reduction in retirement savings 31 cents goes to debt repayments taking into account all types of savings we find full crowding out consistent with previous findings we document that the effect is driven by a minority about 23 percent who actively rebalance their savings

housing markets consumption and financial liberalisation in the major economies abstract this paper analyses the implications of relaxing credit restrictions in housing finance markets a theoretical model of the interaction of financial and housing markets and forward looking agents is developed the effects of financial liberalisation in the model are analysed and evidence from the u s a and u k on the impact of easing credit restrictions is presented estimates are also made of the degree to which credit restrictions may bind on households in those countries where the range of mortgage products on offer is still more limited than in the u k and u s a simulations are undertaken to gauge the effect on consumption saving and bequests of wealth of possible future convergence in national systems of housing finance

house prices home equity based borrowing and the u s household leverage crisis us household leverage sharply increased in the years preceding the 2007 eco nomic recession the top panel of figure 1 shows the steady rise in household debt since 1975 which accelerated beginning in 2002 in just five years the household sector doubled its debt balance in comparison the contemporaneous increase in corporate debt was modest the middle panel shows that the increase in household debt from 2002 to 2007 translated into a striking rise in household leverage as mea sured by the debt to income ratio during the same time period corporate leverage declined the dramatic absolute and relative rise in us household leverage from 2002 to 2007 is unprecedented compared to the last 25 years one reason for the rapid expansion in household leverage during this period is that mortgage credit became more easily available to new home buyers mian and sufi 2009 strong house price appreciation from 2002 to 2006 however which may have been fueled by the availability of mortgage credit to a riskier set of new home buyers could also have had an important feedback effect on household lever age through existing homeowners given that 65 percent of us households already owned their primary residence before the acceleration in house prices the feedback from house prices to borrowing may be an important source of the rapid rise in household leverage that preceded the economic downturn our central goals in this study are to estimate how homeowner borrowing responded to the increase in house prices and to identify which homeowners responded most aggressively we examine this home equity based borrowing channel using a dataset consisting of anonymous individual credit files of a national consumer credit bureau agency we follow a random sample of over 74 000 us homeowners who owned their homes as of 1997 at an annual frequency from the end of 1997 until the end of 2008 the bottom panel of figure 1 plots the growth in debt of 1997 homeowners over time and shows that existing homeowners borrow significantly more debt as their house prices appreciate from 2002 to 2006 while the aggregate trend is suggestive

what do we learn about consumer demand patterns from micro data the aim of this paper is to assess the importance of using micro level data in the econometric analysis of consumer demand to do this we utilize a time series of repeated cross sections covering some 4 000 households in each of 15 years employing a number of different aggregation procedures we conclude that aggregate data alone are unlikely to produce reliable estimates of structural price and income coefficients however once certain aggregation factors as well as trend and seasonal components are included an aggregate model is not necessarily outperformed across all demand equations in terms of forecasting ability jel d12 c52 c31 the purpose of this paper is to develop a complete consumer demand system based on a time series of individual household data and to use it to measure the biases introduced into the study of consumer de mand behavior when aggregate data are used in place of the appropriate microeco nomic data we assess the suitability of ag gregate data through the impact on income and price elasticities and by evaluating the ability of both micro and aggregate based models to forecast aggregate consumer de mand the biases introduced by the use of aggregate data depend upon the way that household characteristics interact with in come and price effects and on departures of demand systems from linearity we explore the structure of microeconomic demand sys tems and the role of household characteris tics in the behavior of consumer demand both for the light this may shed on the pattern of future demands and for the im plications this behavior has for issues of aggregation consumer demand patterns typically found in micro data sets vary considerably across households with different household characteristics and with different levels of income we model this variability by making intercept and slope parameters in the budget share equations of our demand sys tem depend on household characteristics and by allowing for nonlinear total log expenditure terms in fact in theory consistent demand systems it is total ex penditure rather than disposable income that is allocated across goods we find that this general framework leads to a well specified data coherent demand system which is a quadratic extension of the popu lar almost ideal model of angus s deaton and john muellbauer 1980 the micro level estimates are shown to be sensitive to the treatment of endogeneity of total expen diture and to the specification of interaction terms with household characteristics in ad dition this specification is also shown to possess many attractive features for the evaluation of aggregate models

the uk consumption boom of the late 1980s aggregate implications of microeconomic evidence two competing explanations of the uk consumer boom in the late 1980s are the financial liberalisation imperfect housing market hypothesis of muellbauer and murphy and the expectations hypothesis of king we use 15 years of family expenditure surveys and cohort analysis to investigate to what extent these two hypotheses agree with observed changes in consumption patterns we find that the housing markets explanation accounts for much of the increase by older cohorts but cannot be reconciled with the marked rise in expenditure levels of younger households a simple simulation exercise shows instead that the expectations hypothesis can generate increases of expenditure by young consumers of the magnitude observed in our data

house price shocks and household indebtedness in the united kingdom we use household panel data to explore the link between changes in house prices and household indebtedness both secured on housing assets and unsecured in the united kingdom we show that households which are borrowing constrained by a lack of housing equity as collateral make greater use of unsecured debt such as credit cards or personal loans in response to rising house prices which relax this constraint such households are more likely to refinance and to increase their indebtedness relative to unconstrained households however for most households house price movements appear to have little impact on indebtedness

changes in the distribution of housing wealth in great britain 1985 91 during which time sizeable real capital gains accrued to owner occupiers particularly those who were already owner occupiers at the start of this period the paper constructs housing wealth estimates disaggregated by household from the 1985 ghs and 1991 bhps wave 1 in order to explain the distributional consequences of the housing market experience the paper finds that there has been a modest increase in housing wealth inequality but one that is more pronounced for gross housing wealth compared with equity this growth has been offset by the growth in owner occupation and the benefits of the council house right to buy scheme

a life cycle consistent empirical model of family labour supply using cross section data this paper estimates a utility maximising model of the joint determination of male and female labour supplies using a sample of married couples from the u k family expenditure survey the emphasis is on the estimation of within period preferences that are consistent with intertemporal two stage budgeting under uncertainty however the approach we adopt provides an alternative method of estimating certain aspects of life cycle behaviour to the fixed effects constant approach of heckman and macurdy 1980 macurdy 1981 and browning deaton and irish 1985 moreover it relaxes some of the underlying restrictions that are implicit in these constant models under uncertainty

the value of a statistical life under ambiguity aversion abstract the paper shows that ambiguity aversion increases the value of a statistical life if the marginal utility of an increase in wealth is larger if one is alive rather than dead intuitively ambiguity aversion has a similar effect as an increase in the perceived baseline mortality risk and thus operates as the dead anyway effect a numerical example suggests however that ambiguity aversion cannot justify the substantial ambiguity premium apparently embodied in environmental policy making the paper also shows that ambiguity aversion decreases the marginal cost of individual self protection effort but may well decrease its marginal benefit so that the total effect of ambiguity aversion on self protection is unclear

intertemporal consumption durables and liquidity constraints a cohort analysis we provide a theoretical framework to analyse the response of life time maximizing consumers to intertemporal prices of non durable goods and durable goods when the borrowing limit depends on the market value of the stock of durables owned by the consumer we use pseudo panel data on purchases of non durables and durable goods cars and demographic characteristics from the uk family expenditure survey as well as estimates of the durable stock constructed using the uk national travel survey to estimate the equations derived in the first part of the paper we evaluate the shadow prices of these restrictions which were significantly positive for younger consumers in the mid seventies and immediately prior to the 1982 financial liberalisation

booms and busts consumption house prices and expectations over much of the past 25 years house price and consumption growth have been closely synchronized three main hypotheses for this have been proposed increases in house prices raise household wealth and so their consumption house price growth reduces credit constraints by increasing the collateral available to homeowners and house prices and consumption are together influenced by common factors using microeconomic data we find that the relationship between house prices and consumption is stronger for younger than older households contradicting the wealth channel we suggest that common causality has been the most important factor linking house prices and consumption

do house prices affect consumption a re assessment of the wealth hypothesis this paper revives the debate in the literature about the relationship between house prices and consumption by exploring conflicting results in the uk campbell and cocco 2007 find that old owners benefit most from a house price increase and young renters least confirming the so called wealth hypothesis in contrast attanasio et al 2009 find that house prices have the same impact on consumption across age groups we rule out several potential explanations related to data construction and provide evidence that the functional form can reconcile the conflicting results in the two papers

wealth effects and macroeconomic dynamics the effect of wealth on consumption is an issue of long standing interest to economists conventional wisdom suggests that fluctuations in household wealth have driven major swings in economic activity both in the united states and abroad this paper considers the so called consumption wealth effects there is an extensive existing literature on wealth effects that has yielded some insights for example research has documented the relationship between aggregate household wealth and aggregate consumption over time and a large number of household level studies suggest that wealth effects are larger for households facing credit constraints however there are also many unresolved issues regarding the influence of household wealth on consumption we review the most important of these issues and argue that there is a need for much more research in these areas as well as better data sources for conducting such analysis

labour market institutions and household consumption insurance within oecd countries this paper tests empirically whether the effect of idiosyncratic income shocks on aggregate consumption depends on institutional features of national labour markets the results show that in a sample of 15 oecd countries institutional heterogeneity is a significant determinant of the response of household consumption to country specific income shocks this is consistent with the idea that institutionally provided social insurance may help increase income stability when people differ in their ability to access financial markets and smooth consumption fluctuations

is the uk balance of payments sustainable the uk current account deficit john muellbauer and anthony murphy the uk has a large and persistent current account deficit policy makers argue that the deficit is easily financed temporary and therefore not a sign of structural weakness we examine the conditions in which it is appropriate for a country to overspend its current income with the intention of repaying loans out of future income these include an increase in international capital mobility larger net holdings of foreign assets and expectations of faster productivity growth all three apply to the uk so official reasoning is in part correct even so for several decades there has been a trend deterioration of uk trade performance most markedly in manufacturing and we detect no underlying improvement in the 1980s we highlight structural deficiencies in both demand and supply on the demand side we show the importance of rising house prices and easier consumer credit in fuelling the consumer boom to an unwarranted extent this we trace to unjustifiable subsidies to house ownership on the supply side we stress vastly inadequate investment in skill formation education and physical capital these structural deficiencies lead us to a less optimistic view than official policy we draw the policy lessons for the uk and consider whether continental europe will face similar problems as financial markets are liberalized

the role of unemployment insurance in an economy with liquidity constraints and moral hazard the potential welfare benefits of unemployment insurance along with the optimal replacement ratio are studied using a quantitative dynamic general equilibrium model to provide a role for unemployment insurance agents in our economy face exogenous idiosyncratic employment shocks and are unable to borrow or insure themselves through private markets in the absence of moral hazard replacement ratios as high as 65 are optimal and the welfare benefits of unemployment insurance are quite large however if there is moral hazard and the replacement ratio is not set optimally but is instead set to an empirically plausible value the economy can be much worse off than it would be without unemployment insurance

social mobility and the demand for redistribution the poum hypothesis this paper examines the often stated idea that the poor do not support high levels of redistribution because of the hope that they or their offspring may make it up the income ladder this prospect of upward mobility poum hypothesis is shown to be fully compatible with rational expectations and fundamentally linked to concavity in the mobility process a steady state majority could even be simultaneously poorer than average in terms of current income and richer than average in terms of expected future incomes a e rst empirical assessment suggests on the other hand that in recent u s data the poum effect is probably dominated by the demand for social insurance in the future everyone will be world famous for e fteen minutes andy warhol 1968

the regulation of labor author s botero juan djankov simeon la porta rafael lopez de silanes florencio shleifer andrei abstract we investigate the regulation of labor markets through employment collective relations and social security laws in 85 countries we find that the political power of the left is associated with more stringent labor regulations and more generous social security systems and that socialist french and scandinavian legal origin countries have sharply higher levels of labor regulation than do common law countries however the effects of legal origins are larger and explain more of the variation in regulations than those of politics heavier regulation of labor is associated with lower labor force participation and higher unemployment especially of the young these results are most naturally consistent with legal theories according to which countries have pervasive regulaory styles inherited from the transplantation of legal systems

the life cycle model of consumption and saving a central implication of life cycle models is that agents smooth consumption we review the empirical evidence on smoothing at frequencies from within the year up to across a lifetime we find that life cycle models particular those which incorporate realistic features of markets and goods have more empirical successes than failures we also show that some apparent deviations from theoretical predictions imply very small welfare losses for agents finally we emphasize that the coherence of life cycle models imposes an important discipline when incorporating new features into models

does inequality lead to a financial crisis abstract the recent global crisis has sparked interest in the relationship between income inequality credit booms and financial crises rajan 2010 and kumhof and ranciere 2011 propose that rising inequality led to a credit boom and eventually to a financial crisis in the us in the first decade of the 21st century as it did in the 1920s data from 14 advanced countries between 1920 and 2000 suggest these are not general relationships credit booms heighten the probability of a banking crisis but we find no evidence that a rise in top income shares leads to credit booms instead low interest rates and economic expansions are the only two robust determinants of credit booms in our data set anecdotal evidence from us experience in the 1920s and in the years up to 2007 and from other countries does not support the inequality credit crisis nexus rather it points back to a familiar boom bust pattern of declines in interest rates strong growth rising credit asset price booms and crises

consumption responses to a large shock to financial wealth evidence from italy we estimate marginal propensities to consume from wealth shocks for italian households early in the great recession large asset price shocks in 2007 2008 underpin instrumental variables a euro fall in risky financial wealth resulted in cuts in annual total non durable consumption of 8 5 9 5 5 5 7 cents we find small effects on food spending counterfactuals indicate financial wealth effects were relatively important for consumption falls in italy in 2007 08 the estimated effects are consistent with a simulated lifecycle model that captures the wealth shock also consistent with the model are findings of stronger wealth effects for agents who were pessimistic about stock returns

forecasting aggregate consumers expenditure in the u k using the dhsy model the performance of the dhsy model in predicting the growth of aggregate consumers expenditure in the uk over the period 1985 1988 is examined the model is applied to four different combinations of consumption variable and data type results show in all cases the predictive performance of the dhsy model to be poor however applied to seasonally adjusted data an improvement can be achieved by allowing for systematic variation in coefficients in particular a variable coefficient dhsy model displays no tendency to underpredict the growth of total consumers expenditure and accurately captures the volatility of non durable expenditure

house prices and consumer spending recent empirical work shows large consumption responses to house price movements this is at odds with a prominent theoretical view which using the logic of the permanent income hypothesis argues that consumption responses should be small we show that in contrast to this view workhorse models of consumption with incomplete markets calibrated to rich cross sectional micro facts actually predict large consumption responses in line with the data to explain this result we show that consumption responses to permanent house price shocks can be approximated by a simple and robust rule of thumb formula the marginal propensity to consume out of temporary income times the value of housing in our model consumption responses depend on a number of factors such as the level and distribution of debt the size and history of house price shocks and the level of credit supply each of these effects is naturally explained with our simple formula

preferences for redistribution in the land of opportunities this paper explores how individual preferences for redistribution depend on future income prospects in addition to estimating the impact of individuals socioeconomic background and of their subjective perceptions of future mobility we employ panel data to construct dobjectivet measures of expected gains and losses from redistribution for different categories of individuals we find that such measures have considerable explanatory power and perform better than dgeneral mobilityt indexes we also find that preferences for redistribution respond to individual beliefs on what determines one s position in the social ladder ceteris paribus people who believe that the american society offers equal opportunities are more averse to redistribution d 2004 published by elsevier b v

housing wealth and consumption a micro panel study there is strong evidence that house prices and consumption are synchronised there is however disagreement over the causes of this link this study examines if there is a wealth effect of house prices on consumption using a household level panel data set with information about house ownership income wealth and demographics for a large sample of the danish population in the period 1987 96 we model the dependence of the growth rate of total household expenditure with unanticipated innovations to house prices controlling for factors related to competing explanations we find little evidence of a housing wealth effect

intertemporal consumption and credit constraints does total expenditure respond to an exogenous shock to credit there is continuing controversy over the importance of credit constraints this paper investigates whether total household expenditure and debt is affected by an exogenous increase in access to credit provided by a credit market reform that enabled danish house owners to use housing equity as collateral for consumption loans we find that the magnitude of the response is correlated with the amount of equity released by the reform and that the effect is strongest for younger households even for this group the response was moderate the aggregate effect of the reform was significant but small

efficient unemployment insurance this paper constructs a tractable general equilibrium model of search with risk aversion an increase in risk aversion reduces wages unemployment and investment unemployment insurance has the opposite effect insured workers seek high wage jobs with high unemployment risk an economy with risk neutral workers achieves maximal output without any unemployment insurance but an economy with risk averse workers requires a positive level of unemployment insurance to maximize output therefore moderate unemployment insurance not only improves risk sharing but also increases output

why are some people and countries more protectionist than others we analyze two cross country data sets that contain information on attitudes toward trade as well as a broad range of socio demographic and other indicators we nd that pro trade preferences are signi cantly and robustly correlated with an individual s level of human capital in the manner predicted by the factor endowments model preferences over trade are also correlated with the trade exposure of the sector in which an individual is employed individuals in non traded sectors tend to be the most pro trade while individuals in sectors with a revealed comparative disadvantage are the most protectionist third an individual s relative economic status has a very strong positive association withpro trade attitudes finally non economic determinants in the form of values identities and attachments play an important role in explaining the variation in preferences over trade high degrees of neighborhood attachment and nationalism patriotism are associated withprotectionist tendencies c

redistributive taxation and personal bankruptcy in u s states abstract personal bankruptcy regulation and redistributive taxes and transfers vary considerably across u s states and over time our hypothesis is that both policies are imperfect substitutes in insuring consumption of risk averse agents in incomplete markets exploiting data variation over time for 18 u s states for the period 1980 2003 we find considerable support for this hypothesis redistributive taxation and bankruptcy exemptions are negatively correlated and both policies are associated with more equal consumption growth

pension reform and saving in britain the paper examines the pension programme in britain focusing on reforms that have increased the fraction of the work force opting out of public provision and that have permitted individuals to choose their private pension provider it also examines the issue of pension provision and household saving the paper highlights the disparities in retirement saving behaviour across types of pension provision and different households the paper discusses the policy issues of the adequacy of household saving and the impact of pension reform on household saving and the public finances

house price shocks negative equity and household consumption in the united kingdom we examine the impact of unanticipated housing capital gains on consumption behavior using data from the british household panel survey and county level house price data we condition the models on household financial expectations and on household real financial capital gains imputed from the family resources survey we find a marginal propensity to consume out of unanticipated shocks to housing wealth of 0 01 omitting the measure of financial expectations biases the results upward we find little evidence of heterogeneity in responses of young and old homeowners but differences between owners and renters we also find asymmetric behavior between house price rises and falls and a disproportionate impact on saving if the household had negative housing equity at the start of the period jel d91 e21 r31 c 2010 by the european economic association

consumption over the life cycle and over the business cycle the main aim of this paper is to assess the validity of the life cycle model of consumption in particular we address an issue that has recently received much attention especially in the macroeconomic literature that of excess sensitivity of consumption growth to income growth we do this using a time series of cross sections and a novel and flexible parameterization of preferences the former allows us to address aggregation issues directly while with the latter we can allow both the discount factor and the elasticity of intertemporal substitution eis to be affected by various observable variables and lifetime wealth the main findings can be summarized as follows i the excess sensitivity of consumption growth to labor income disappears when we control for demographic variables this is true both at life cycle and business cycle frequencies ii estimation of a flexible specification of preferences indicates that the elasticity of intertemporal substitution is a function of several variables including the level of consumption the eis increases with the level of consumption as expected iii the variables that change the eis are also important in explaining why we observe excess sensitivity over the business cycle iv we are able to reconcile our results with those reported both in the macro and micro literature v in our specification the elasticity of intertemporal substitution is not very well determined this result however should be taken with care as we have not made an effort to construct a preferred specification which would probably include additional controls for labor supply behavior the evidence presented shows that the life cycle model cannot be easily dismissed indeed we believe that the model does a good job at representing consumption behavior both over the life cycle and over the business cycle