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Consumption Responses to a Large Shock to Financial Wealth: Evidence from Italy
Author(s) -
Bottazzi Renata,
Trucchi Serena,
Wakefield Matthew
Publication year - 2020
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12339
Subject(s) - economics , shock (circulatory) , consumption (sociology) , wealth effect , asset (computer security) , monetary economics , counterfactual thinking , marginal propensity to consume , panel data , marginal utility , consumer spending , national wealth , macroeconomics , econometrics , finance , microeconomics , monetary policy , market liquidity , medicine , social science , philosophy , computer security , epistemology , recession , sociology , computer science
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.