Benjamin Faber, Thibault Fally, 02 August 2017

A recent literature has documented the impact of firm heterogeneity on workers’ earnings. This column assesses firm heterogeneity in the context of its impact on households’ cost of living. Rich and poor households source their consumption differently, and are therefore impacted differently by asymmetries in heterogeneous firms. An analysis suggests that moderate trade liberalisation could lead to a 1.5-2.5% lower cost-of-living inflation in retail consumption for the richest 20% of US households compared to the poorest 20%.

Peter Bofinger, Mathias Ries, 29 July 2017

There is a broad consensus that the global decline in real interest rates can be explained with a higher propensity to save, above all due to demographic reasons. This column argues that this view relies on a commodity theory of finance, which is inadequate for analysis of real world phenomena. In a monetary theory of finance, household saving does not release funds for investment, it simply redistributes existing funds. In addition, the column shows that at the global level, the gross household saving rate has declined since the 1980s, as well as net saving rates.

David Autor, 21 July 2017

How did trade with China disrupt production and consumption in the US? David Autor discusses what could have happened to consumer prices and the manufacturing sector. This video was recorded at the Institute for Fiscal Studies in June 2017. The full lecture can be watched here.

Christiane Baumeister, Lutz Kilian, 18 May 2017

The sluggish growth of the US economy after the 2014-2016 decline in the oil price surprised many economists. This column argues that it should have been expected. The modest stimulus to private consumption and non-oil business investment was largely offset by a large decline in investment by the oil sector. Growth was further slowed by a simultaneous global economic slowdown, reflected in lower US exports. 

Tim Besley, Avinash Dixit, 31 March 2017

Many scientists agree that the probability of a rare environmental disaster increases as the stock of greenhouse gases accumulate in the atmosphere. This column asks how much consumption current generations should be willing to sacrifice to reduce the risk of such a future catastrophe. If there were a way of immediately eliminating the risk of all future catastrophes, society should be willing to sacrifice 16% of its consumption in perpetuity to achieve this. A sacrifice of 5.8% of annual consumption could bring about a 30% reduction in emissions, in line with the reductions contemplated in agreements such as the Kyoto Protocol.

Rick van der Ploeg, 24 December 2016

Policy advice for countries managing oil and gas windfalls is typically to smooth consumption boosts by borrowing on international capital markets pre-windfall, repaying the debt and accumulating assets in a sovereign wealth fund during the windfall, and withdrawing from that fund when the windfall ends. This column outlines various reasons why this approach can be disastrous for developing countries, and also considers the best response to a commodity price crash.

John Muellbauer, 21 December 2016

The failure of the New Keynesian dynamic stochastic general equilibrium models to capture interactions of finance and the real economy has been widely recognised since the Global Crisis. This column argues that the flaws in these models stem from unrealistic micro-foundations for household behaviour and from wrongly assuming that aggregate behaviour mimics a fully informed ‘representative agent’. Rather than ‘one-size-fits-all’ monetary and macroprudential policy, institutional differences between countries imply major differences for monetary policy transmission and policy.

Olympia Bover, Jose Maria Casado, Sónia Costa, Philip Du Caju, Yvonne McCarthy, Eva Sierminska, Panagiota Tzamourani, Ernesto Villanueva, Tibor Zavadil, 08 November 2016

Household micro-data reveal striking differences in secured debt holdings across Eurozone countries. This column presents new evidence on the role of household characteristics and country institutions in accounting for the cross-country patterns observed. In countries with lengthier asset repossession periods, young or low-income households face higher borrowing costs, leading to a lower probability of holding mortgages.

Jean-Noël Barrot, Erik Loualiche, Matthew Plosser, Julien Sauvagnat, 21 October 2016

In the years preceding the Great Recession there was a dramatic rise in household debt in the US, and an increase in import competition triggered by the expansion of China and other low-wage countries. This column uses consumer credit data to argue that these phenomena are intimately linked. Household debt levels increased significantly in counties where US manufacturing jobs shifted overseas, and regional exposure to import competition explains 30% of the cross-regional variation in the growth in household debt.

Peter Bofinger, Philipp Scheuermeyer, 20 October 2016

The effect of income distribution on aggregate saving has important implications for aggregate demand and global current account imbalances.  Drawing on evidence from a panel of high-income OECD countries, this column documents a hump-shaped relationship between inequality and aggregate saving rates. It also shows that the relationship between inequality and saving depends on financial market conditions.

Larry Levin, Matthew S. Lewis, Frank Wolak, 13 October 2016

A consensus that the demand for gasoline is price inelastic means that policymakers have opted to disregard price instruments when addressing gasoline consumption and climate change. This column analyses daily citywide data on gasoline prices and consumption to show that demand for gasoline is in fact substantially more elastic than previously thought. This is a major argument in favour of the effectiveness of price-based mechanisms in reducing greenhouse gas emissions.

Giacomo De Giorgi, Anders Frederiksen, Luigi Pistaferri, 17 September 2016

Household consumption can be influenced by the consumption behaviour of peers. This column examines why this is the case, and considers some policy implications. The tendency for individuals to under-save (or over-borrow) in an attempt to ‘keep up with the Joneses’ appears to be driven by the average consumption of their peers, rather than by the consumption of conspicuous items. If tax policy fails to consider these peer effects, it risks wrongly estimating the effects of tax reforms that target certain groups.

David Cashin, Takashi Unayama, 18 June 2016

Japan’s prime minister recently announced that a planned 2% VAT increase would be postponed from 2017 to 2019. This column explores how Japanese household consumption adjusted to a VAT increase that was announced in 2013 and implemented in 2014. Household consumption fell by around 4% upon announcement and 1% upon implementation, suggesting that most of the negative impact of a VAT rate increase occurs at the time of the announcement. 

James Cloyne, Clodomiro Ferreira, Paolo Surico, 21 April 2016

Monetary policy has significantly heterogeneous effects on private consumption, which depend on the household's debt and balance sheet position. This column suggests that households with mortgage debt behave in a liquidity-constrained manner, while those without are far less sensitive to movements in interest rates. Though the direct channel of monetary transmission – i.e. the movement in interest cash flows – also affects the expenditure of mortgagors, most of the aggregate effect comes via the stimulus to the income of all housing tenure groups.

Orazio Attanasio, 23 October 2015

Angus Deaton of Princeton University has been awarded the 2015 Nobel Prize in Economic Sciences ‘for his analysis of consumption, poverty, and welfare’. This column outlines his key contributions.

Antonio Acconcia, Giancarlo Corsetti, Saverio Simonelli, 14 August 2015

Fiscal transfers are successful in stimulating aggregate demand to the extent that they reach households with a high marginal propensity to consume. Using micro evidence from Italian earthquakes, this column argues that a well-designed programme of temporary transfers, targeted to relatively wealthy but possibly illiquid households, can be quite helpful in speeding up recovery.

Bas Bakker, Joshua Felman, 06 February 2015

Much research about the Great Recession in the US has focused on the boom-bust in housing wealth and spending of the middle class. This column argues that a large role was actually played by the rich. The savings rate of the rich went through a similar cycle as that of the middle class with rising wealth first stimulating their consumption and falling wealth restraining it. Most importantly, the wealth of the rich has become so large and volatile that wealth effects on their consumption could impact the whole economy. 

Charles Goodhart, Philipp Erfurth, 04 November 2014

Most of the world is now at the point where the support ratio is becoming adverse, and the growth of the global workforce is slowing. This column argues that these changes will have profound and negative effects on economic growth. This implies that negative real interest rates are not the new normal, but rather an extreme artefact of a series of trends, several of which are coming to an end. By 2025, real interest rates should have returned to their historical equilibrium value of around 2.5–3%.

Charles Goodhart, Philipp Erfurth, 03 November 2014

There has been a long-term downward trend in labour’s share of national income, depressing both demand and inflation, and thus prompting ever more expansionary monetary policies. This column argues that, while understandable in a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance. The authors propose policies to raise the share of equity finance in housing markets; such reforms could be extended to other sectors of the economy.

Olivier Coibion, Yuriy Gorodnichenko, Lorenz Kueng, John Silvia, 25 October 2014

There are several conflicting channels through which monetary policy could affect the distribution of wealth, income, and consumption. This column argues that contractionary monetary policy raised inequality in the US, while expansionary monetary policy lowered it. This evidence stresses the need for monetary policy models that take into account heterogeneity across households. Current monetary policy models may significantly understate the welfare costs of zero-bound episodes.   

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