How Do Households Respond to Income Shocks?
When people face a boost or a hit to their income, how do they adjust their spending and saving? To answer this question, in “How Do Households Respond to Income Shocks?” Senior Economist Egor Malkov and his co-authors Dirk Krueger (University of Pennsylvania) and Fabrizio Perri (Federal Reserve Bank of Minneapolis) use a panel data set from Italy, spanning a 25-year period from 1991 to 2016, to study how household consumption and wealth vary when income changes. They show that shocks to labor income are associated with modest changes in spending, large changes in wealth, and negligible changes in transfers and non-labor income. Specifically, business owners and, especially, real estate owners experience very strong co-movement of their wealth with income shocks. The findings of the paper suggest that economists and policymakers need to keep wealth front-of-mind when considering how income shocks affect families.
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Senior Economist
