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We use data from the 2009 Internet Survey of the Health and Retirement Study to examine the consumption impact of wealth shocks and unemployment during the Great Recession in the US. We find that many households experienced large capital losses in housing and in their financial portfolios, and that a non-trivial fraction of respondents have lost their job. As a consequence of these shocks, many households reduced substantially their expenditures. We estimate that the marginal propensities to consume with respect to housing and financial wealth are 1 and 3.3 percentage points, respectively. In addition, those who became unemployed reduced spending by 10 percent. We also distinguish the effect of perceived transitory and permanent wealth shocks, splitting the sample between households who think that the stock market is likely to recover in a year’s time, and those who do not. In line with the predictions of standard models of intertemporal choice, we find that the latter group adjusted much more than the former its spending in response to financial wealth shocks.
Using a nonlinear Bayesian likelihood approach that fully accounts for the zero lower bound on nominal interest rates, the authors analyze US post-crisis business cycle dynamics and provide reference parameter estimates. They find that neither the inclusion of financial frictions nor that of household heterogeneity improve the empirical fit of the standard model, or its ability to provide a joint explanation for the post-2007 dynamics. Associated financial shocks mis-predict an increase in consumption. The common practice of omitting the ZLB period in the estimation severely distorts the analysis of the more recent economic dynamics.
Unemployment and political trust across 24 Western democracies: evidence on a welfare state paradox
(2021)
Set against the backdrop of the Great Recession, the paper explores the interplay of unemployment experiences and political trust in the USA and 23 European countries between 2002 and 2017. Drawing on harmonized data from the European Social Survey and the General Social Survey, we confirm that citizens’ personal experiences of unemployment depress trust in democratic institutions in all countries. Using multilevel linear probability models, we show that the relationship between unemployment and political trust varies between countries, and that, paradoxically, the negative effect of unemployment on political trust is consistently stronger in the more generous welfare states. This result holds while controlling for a range of other household and country-level predictors, and even in mediation models that incorporate measures of households’ economic situation to explain the negative effect of unemployment on trust. As expected, country differences in the generosity of welfare states are reflected in the degree to which financial difficulties are mediating the relationship between unemployment and political trust. Overlaying economic deprivation, however, cultural mechanisms of stigmatization or status deprivation seem to create negative responses to unemployment experiences, and these render the effect of unemployment on political trust increasingly negative in objectively more generous welfare states.