Sixth Conference on Household Finance and Consumption

When 16 December 2019 9:00 AM
Where Central Bank of Ireland, North Wall Quay, Dublin 1

The European Central Bank organises a biennial conference on household finance and consumption. Its objective is to foster empirical and theoretical research on the implications of household heterogeneity for the accumulation of assets and debt, consumption/saving behaviour and the transmission and effects of monetary policy. The two-day conference on 16 and 17 December 2019 in Dublin focused on research that uses household-level data, with a special interest in the data from the Household Finance and Consumption Survey (HFCS).


  • Adrien Auclert, Stanford University
  • Christopher Carroll, Johns Hopkins University
  • Ulrike Malmendier, University of California, Berkeley
  • Antoinette Schoar, MIT Sloan School of Management


Exposure to daily price changes and inflation expectations

Authors: Michael Weber, Chicago Booth, with Francesco D’Acunto, Ulrike Malmendier and Juan Ospina

Abstract: We show that, to form aggregate inflation expectations, consumers rely on the price changes they face in their daily lives while grocery shopping. Specifically, the frequency and size of price changes, rather than their expenditure share, matter for individuals' inflation expectations. To document these facts, we collect novel micro data for a representative US sample that uniquely match individual expectations, detailed information about consumption bundles, and item-level prices. Our results suggest that the frequency and size of grocery-price changes to which consumers are personally exposed should be incorporated in models of expectations formation. Central banks' focus on core inflation - which excludes grocery prices - to design expectations-based policies might lead to systematic mistakes.


Learning about housing costs: Survey evidence from the German house price boom

Authors: Fabian Kindermann, University of Regensburg, with Julia Le Blanc, Monika Piazzesi and Martin Schneider

Abstract: This paper uses new household survey data to study expectation formation during the ongoing German housing boom. On average, households predict reversal to trend and, hence, underestimate actual price growth. In the cross section, housing tenure is a sufficient statistic for forecasts given standard household characteristics. Renters are more optimistic than owners and therefore make better forecasts. A model of learning about housing cost explains these facts: renters pay for housing services and consequently understand their value better than owners, who simply consume them. As a result, renters are more optimistic in booms driven by an increase in rents or a recovery from financial distress. The model is also consistent with survey data on households’ plans and reported sources of information.  


Consumer regulation as whack-a-mole: Evidence from credit card markets

Author: Antoinette Schoar, MIT Sloan


Real effects of relaxing financial constraints on homeowners: Evidence from Danish firms

Authors: Alessia De Stefani, Danmarks Nationalbank, with Julia Moertel

Abstract: We exploit Danish administrative registries to study how the introduction of interest-only mortgages in 2003 affects job creation and the skill composition of the workforce over the business cycle. The reform significantly increases household expenditure and firms react to this demand shock by creating jobs. These positions, however, are classified as low-skilled occupations, filled by younger and less educated workers who face earlier separations and a higher degree of unemployment ex-post.


Borrowing constraints, own labour and homeownership

Authors: Giuseppe Pulina and Michael Ziegelmeyer, both Banque centrale du Luxembourg, with Peter Lindner and Thomas Mathä

Abstract: Using a set of unique questions in the Luxembourg Household Finance and Consumption Survey (LU-HFCS) from 2014, we show that a substantial share of households contribute with their own labour (also sweat equity) when they acquire their main residence. These contributions ease borrowing constraints, since they reduce the need for external financing and financial costs. Moreover, most lenders declare that own labour contributions may help households to qualify for a mortgage. We develop a simple theoretical model and show that own labour contributions decrease in the financial resources available, while they increase in the mortgage interest rate. These theoretical results are supported by the empirical analysis, which additionally shows that own labour contributions vary across households characteristics (age, gender, profession) and the type of dwelling (house, apartment).


Consumption quality: A new perspective on the welfare implications of business cycle fluctuations

Authors: Leslie Sheng Shen, Federal Reserve Board, with Casper Nordal Jørgensen

Abstract: This paper introduces a new approach for estimating the welfare costs of business cycle fluctuations. We quantify and evaluate a new channel that consumers use to smooth macroeconomic shocks—the quality channel of consumption reallocation. Using detailed micro-level panel data on household expenditures, we show that there exists significant heterogeneity in the degree of reallocation across the quality vs. quantity margins of consumption reallocation across income groups: high-income households tend to adjust their consumption at the quality channel when facing negative shocks, while the low-income households are more likely to adjust at the quantity margin. Our results suggest the poor may be rationed in their margins of consumption reallocations when hit by a negative shock and thereby bear a disproportionately greater share of the cost of business cycle fluctuations. We develop a model in which households have non-homothetic preferences and value both the quality and quantity of purchased products. Using the model, we estimate structural parameters that are consistent with the patterns of consumption behavior observed in the data and analyze the welfare implications of business cycles fluctuations.


Taxation of durables, non-durables and earnings with heterogeneous preferences

Authors: Francesca Parodi, Collegio Carlo Alberto

Abstract: Consumption and personal income taxes are key policy instruments. They are both major sources of government revenue and defining elements in social insurance and redistribution policies. In this paper, I adopt a dynamic structural approach to study the design of these taxes and their interactions. I develop a life-cycle model of household consumption, saving and employment choices with heterogeneous preferences, multiple non-durable goods and partially irreversible durables. I estimate the model on micro data and show that its rich structure is key in reproducing the empirical patterns of households' life-cycle economic behavior. I then use the estimated model to quantitatively characterize the optimal tax rates on different commodities and on labor income in a utilitarian framework and under alternative scenarios of preference heterogeneity. I find that durables should be subsidized in presence of pre-commitment and uncertainty and that the optimal combination of taxes on non-durables and labor income crucially depends on the degree of preference heterogeneity. Allowing for a more general social welfare criterion with varying degrees of government inequality aversion, I show that the model can rationalize the tax systems observed in reality and that differentiated consumption taxes - with higher rates on durables - serve a redistributive purpose jointly with the progressivity of labor income taxes.


MPC heterogeneity in Europe: Sources and policy implications

Authors: Miguel Ampudia, ECB, with Russell Cooper, Julia Le Blanc and Guozhong Zhu

Abstract: This paper studies household financial choices in four euro area countries. The goal of the analysis is to understand the sources of the differences in these choices and their implications for the impact of monetary policy on consumption. The estimation of key parameters uses a simulated method of moments approach to match moments related to asset market participation rates, portfolio shares and wealth to income ratios by education and country. The policy functions based upon the estimation are used to characterize the distributions of the marginal propensity to consume across households for each of the four countries. Due to this heterogeneity in consumption responses, monetary policy, operating through its effects on household income and asset market returns, has a differential impact on individuals within and across countries. Generally, poor households respond more to the income variations produced by monetary policy innovations while rich households respond more to policy-induced variations in stock returns. Finally, monetary contractions have a larger impact on consumption in Germany and France while expansions have a larger impact in Italy and Spain.


Wealth effects on consumption during the sovereign debt crisis: Households’ heterogeneity in the euro area

Authors: Frédérique Savignac, Banque de France, with Bertrand Garbinti, Pierre Lamarche and Charlélie Lecanu

Abstract: This paper studies the heterogeneity of the marginal propensity to consume out of wealth (MPC) both across and within countries. We estimate the MPC based on two waves of a cross-country harmonized household level dataset which combines several households’ surveys on wealth, income and consumption. We use panel regressions and an instrumental variable approach to deal with the wealth endogeneity issue related to saving behaviours. We document five results. First, our panel-based MPC estimates are very similar to those obtained on aggregate data and show substantial heterogeneity across countries. It levels at 4.6 cents in Italy, 2.3 cents in Belgium, 1.6 cent in Spain, and less than one cent in Germany and in Cyprus. The wealth effect is coming both from housing and financial assets, while the main asset channel varies between countries. Second, whatever the country, the MPC is higher for low-wealth households, and for all non-durable consumption expenditure. Third, we find some asymmetries across countries regarding the reaction to losses versus gains. Fourth, higher MPC is obtained in all countries for the two main consumption expenditure categories. Fifth, we find evidences that housing prices shock decreases consumption inequality while financial wealth shocks have a limited effect on consumption inequality.


Income risk asymmetries, consumption and wealth: The dynamics of inequality in the Spanish Survey of Household Finances

Authors: Laura Hospido, Banco de España, with Henrique Basso, Olympia Bover and José María Casado

Abstract: We examine if predictive income distributions estimated using Spanish data on income realizations exhibit the same kind of non-linearities documented in the cases of US or Norway. We contribute to the literature but complementing the measure of households income risk using income subjective expectations. In addition, we estimate the transmission of income fluctuations to consumption. We find that there is more heterogeneity in income risk than linear models would suggest: the persistence of an income shock varies with its size and the position of the household in the income distribution. The presence of such income risk is also present in the expectations data. Finally, we document that the non-linear income process induces heterogeneous consumption trajectories for different households. Hence, the aggregate effects of fiscal policies may depend on the target population.


The long shadows of the Great Inflation: Evidence from residential mortgages

Author: Ulrike Malmendier, University of California, Berkeley, Matthew J. Botsch, Bowdoin College


Household Heterogeneity and Monetary Transmission

Author: Philip R. Lane, European Central Bank


MoNk: Mortgages in a New-Keynesian Model

Authors: Carlos Garriga, Federal Reserve Bank of St. Louis, with Finn Kydland and Roman Ṥustek

Abstract: We propose a tractable framework for monetary policy analysis in which both short- and long-term debt affect equilibrium outcomes. This objective is motivated by observations from two literatures suggesting that monetary policy contains a dimension affecting expected future interest rates and thus the costs of long-term financing. In New-Keynesian models, however, long-term loans are redundant assets. We use the model to address three questions: what are the effects of statement vs. action policy shocks; how important are standard New-Keynesian vs. cash flow effects in their transmission; and what is the interaction between these two effects?


Owning up: Closely held firms and wealth inequality

Author: Alessandra Peter, Princeton University

Abstract: This paper studies how frictions in debt and equity markets affect wealth inequality in Eurozone countries. Using micro data on households and firms, I document that in more unequal countries, there are more privately held firms and ownership of publicly traded firms is more concentrated. I develop a dynamic general equilibrium model in which entrepreneurs have the option to run a private firm and issue debt, or go public and also issue outside equity. Both forms of external finance are subject to country-specific frictions. With more access to debt, entrepreneurs can run larger firms and are wealthier. Similar to debt, outside equity allows entrepreneurs to increase investment in their firm, but it also reduces their risk exposure, which lowers savings and wealth holdings. When parameters are chosen to match the facts I document on firm ownership and financing, the model successfully predicts differences in wealth concentration across countries.


Household balance sheet channels of monetary policy: A “back of an envelope” calculation for the euro area

Authors: Jirka Slacalek, ECB, with Oreste Tristani and Gianluca Violante

Abstract: This paper systematically quantifies the main channels through which monetary policy produces heterogeneous effects on households across large European countries, depending on the composition of their income and wealth. Motivated by the standard Heterogeneous Agent New Keynesian framework we illustrate how various channels of transmission - intertemporal substitution, net interest rate exposure, net nominal exposure, indirect wealth effects and indirect income channels - affect consumption expenditures of individual households. We find that the indirect income channel has an overwhelming importance for households holding little liquid assets and is also a substantial driver of consumption at the aggregate level. In addition, we document that the strength of the transmission channels is shaped by structural and institutional factors, such as the prevalence of adjustable-rate mortgages, homeownership rates, housing supply elasticity, holdings of inflation-sensitive assets and labor market institutions.


Real interest rates and the redistribution of nominal wealth in the euro area

Authors: Moritz Roth, Banco de España, with Maarten Dossche, Jacob Hartwig, Antonio Matas Mir and Panagiota Tzamourani

Abstract: Since 2008 the ECB has lowered nominal interest rates significantly in response to lower inflation, i.e. nominal interest rates and inflation have been much lower than anticipated. We compute the exposures of nominal wealth of different sectors and households to surprises in inflation and nominal interest rates. With these exposures we assess to what extent lower inflation and interest rates in the euro area have altered the distribution of the real value of nominal wealth compared to initial expectations.


Ageing, net wealth and monetary policy

Authors: Zeynep Kantur, Bilkent University, and Ludmila Fadejeva, Latvijas Banka

Abstract: We observe differences in net wealth distribution by age among European countries. Western EU countries' net wealth distribution is consistent with the life cycle hypothesis. However in Eastern EU countries, wealth distribution is skewed towards younger ages. The aim of the paper is twofold: first we study the factors of these differences in net wealth distribution by age; second we evaluate the impact of these differences on the transmission of monetary policy. To do so, we develop a modified New Keynesian model where the demand side is represented by a multi-period overlapping generations setup and the supply side of the economy follows a New Keynesian framework. The model is used to analyze the interaction between monetary policy, demographics, productivity differences among generations and wealth accumulation in a coherent general equilibrium model. Household Finance and Consumption Survey (HFCS) database is used to calibrate the model for two groups of European countries. This paper argues that demographics and wealth distribution over age should be expected to have important bearing on the effectiveness and hence conduct of monetary policy.


HFCS: Future of Macroeconomics! (If …)

Author: Christopher Carroll, Johns Hopkins University

Mortgage debt, consumption and illiquid housing markets in the Great Recession

Authors: Aaron Hedlund, University of Missouri, with Carlos Garriga

Abstract: Using a quantitative heterogeneous agents macro-housing model and detailed micro data, this paper studies the drivers of the 2006-2011 housing bust, its spillovers to consumption and the credit market, and the ability of mortgage rate interventions to accelerate the recovery. The model features tenure choice between owning and renting, rich portfolio choice, long-term defaultable mortgages, and endogenously illiquid housing from search frictions. The equilibrium analysis and empirical evidence suggest that the deterioration in house prices and liquidity - transmitted to consumption via balance sheets that vary in composition and depth - is central to explaining the observed aggregate and cross-sectional patterns.

Consumption heterogeneity: Micro drivers and macro implications

Authors: Edmund Crawley, Federal Reserve Board, with Andreas Kuchler

Abstract: This paper aims to test the microfoundations of consumption models and quantify the macro implications of consumption heterogeneity. We propose a new empirical method to estimate the sensitivity of consumption to permanent and transitory income shocks for different groups of households. We then apply this method to administrative data from Denmark. The large sample size, along with detailed household balance sheet information, allows us to finely divide the population along relevant dimensions. For example, we find that households who stand to lose from an interest rate hike are significantly more sensitive to income shocks than those who stand to gain. Following a one percentage point rate increase, we estimate consumption will decrease by 26 basis points through this interest rate exposure channel alone, making this channel substantially larger than the intertemporal substitution channel that is the key mechanism in representative agent New Keynesian models.