Helene Onshuus, UiO: Does High Leverage Amplify Consumption Response to Income changes?
Department seminar. Helene Onshuus is a PhD candidate at UiO. She will present a paper entitled "Does High Leverage Amplify Consumption Response to Income changes?", co-authored by Andreas Fagereng and Kjersti Næss Torstensen.
Helene Onshuus. Photo: Tron Trondal
A key concern amongst policy makers is that high levels of debt amongst households will amplify their response to shocks inducing deeper and longer recessions. In this paper we analyze to what extent does the households balance sheet decomposition affect the response in key variables to a negative income shock. We address these questions using a sample of Norwegian households experiencing an unemployment spell in the period 1999 to 2014, utilizing detailed Norwegian Registry data at the household level. First, we document the evolution of central variables such as income, consumption and balance sheet components around the time of job loss, paying particular attention to how households initial balance sheet position affects the development. Second, we focus on the response of consumption in the year of job loss, and estimate the marginal propensity to consume out of the income drop. A crucial question is how the variables would have evolved absent the job loss. To address this question, we construct a control group, using matching techniques, based on the same sampling criteria except that the household did not experience a job loss in that given year.