Abstract
Overall, there is now considerable evidence that financial constraints are at the root of the lack of consumption smoothing during the Great Recession. We push this evidence forward and show that in the presence of credit constraints, a job loss leads to larger drops in households? consumption. We build a set of testable hypotheses from our theoretical model and employ microdata taken from the second round of the Life in Transition Survey (LiTS II) (European Bank for Reconstruction and Development 2010). We specifically assess the role of financial constraints in explaining households? consumption coping strategies after the crisis shocks. Economic hardship is more likely to be observed if households experience difficulties in meeting outstanding debt obligations or in obtaining new credit lines because of financial constraints. The impact of job and wage shocks on households? consumption is much attenuated, by around a half, when we control for sample selection bias in accessing the formal credit markets. In the context of increasing impoverishment across Europe, the paper shows that a careful analysis of the main determinants of households? economic and financial hardship is crucial to formulate targeted measures at the regional and local level.
Highlights
The global financial crisis and the subsequent great recession caused substantial economic and financial harm among European households, but the effects are not uniform across individuals and across regions and localities
From a purely statistical viewpoint, a positive and statistically significant ρ indicates a positive and interactive correlation between the two dependent variables, economic and financial hardship, suggesting that it is potentially harmful to explore them in a separate fashion
Concerning age, our results show that in Western European countries people aged over 65 experience a reduction in the likelihood of economic and financial hardship by 11.4% and 16.1%, respectively
Summary
The global financial crisis and the subsequent great recession caused substantial economic and financial harm among European households, but the effects are not uniform across individuals and across regions and localities. Less-educated and low-income families have been among the most vulnerable groups differences in households’ financial behaviour were not sufficiently investigated in the relevant literature. The connection between households’ consumption decisions and the presence of financial constraints is crucial to evaluate how people respond to unanticipated shocks. Determining the nature of shocks, whether they are linked to a job loss or wage reduction, is fundamental to assess how they may affect households’ consumption response, and the role of the credit markets in smoothing consumption fluctuations (Dimitris Christelis, Dimitris Georgarakos, and Tullio Jappelli 2015)
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