Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2021-04-19
Number: 21-030/VI
Author-Name: Lorenzo Pozzi
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Barbara Sadaba
Author-Workplace-Name: Bank of Canada
Title: Macroeconomic disasters and consumption smoothing
Abstract: Macroeconomic disasters (wars, pandemics, depressions) are characterized by drastic shifts and increased volatility of the aggregate consumption to income ratio (or, conversely, the saving ratio). By standard intertemporal budget constraint logic, this ratio is linked to future income and consumption growth rates and therefore should have predictive power for these variables. We investigate whether this predictive ability changes during macroeconomic disasters as this can signal changes in consumer behavior. Through the estimation of panel data regressions for industrial economies using historical annual data, we find that rare macroeconomic disasters increase the predictive ability of this ratio for both future income and consumption growth rates. While we also find evidence of increased predictability for the ongoing Covid-19 pandemic, this is not the case for other postwar recessions. Our results point to a significant reduction in consumption smoothing during disasters. Using a savers-spenders model, we show that this reduction can be interpreted as stemming from an increase during disasters of the number of rule-of-thumb consumers who spend current income in every period as well as from a larger precautionary saving motive of those consumers who do optimize.
Classification-JEL: C23, E21
Keywords: consumption, saving, macroeconomic disasters, Covid-19, panel data
File-URL: https://papers.tinbergen.nl/21030.pdf
File-Format: application/pdf
File-Size: 788,962 bytes
Handle: RePEc:tin:wpaper:20210030