Job Market Paper:
This paper investigates how the labor market conditions prior to the Great Recession influenced the magnitude of the consumption decline during the crisis. In particular, it focuses on the interaction between household asset and labor market choices in the face of a lower job separation rate. I build a model that incorporates a jobs ladder, heterogeneity in job risk, saving in liquid and illiquid assets and long term mortgages. The model replicates key features of income process, the positive correlation between job risk and the liquidity of household portfolios and captures the housing choices following a job separation. The joint determination of asset and labor market outcomes provides a novel mechanism by which the state of the economy affects the magnitude of the aggregate response to labor market shocks. The fact the Great Recession occurred following a tranquil labor market environment amplified the negative response of consumption by almost 40 percent. Further, job risk heterogeneity increased the persistence of the consumption decline, while the cross sectional housing response provides evidence in support of the importance of this mechanism during the Great Recession
Joint with M. Ravn, O. Attanasio, and M. Padula
In this paper we consider how car purchase behaviour changes at the onset and during a recession. In particular, by using the rich information available in the Consumer Expenditure Survey, we look both at the number of individuals buying a car, and at the size of the car they buy. We show that the behaviour during the Great Recession of 2008-2010 is remarkably different from previous recessions. We interpret the evidence through the prism of a life cycle model where individuals receive idiosyncratic uninsurable income as well as aggregate income shocks and stochastic borrowing constraints. Households allocate their resources between cars and non-durable consumption. Cars are large and costly to transact but can be financed through car loans. This implies an (S,s) type of durables adjustment. We show that, because of their salience and the transaction costs, cars are particularly sensitive to changes in the perception of future expected income and its variability. We show that persistent common income shocks explain the consumption data better than changes in borrowing constraints and idiosyncratic income shocks.
This paper studies role of credit shocks in household consumption dynamics. It emphasizes the option value of previously agreed credit terms, which fundamentally change the response of the economy to credit shocks. Agents' ability to retain previously agreed credit terms provides a powerful propagation channel by lowering the probability of durable adjustment long after a credit shock hits. Evidence in the micro-data is consistent with this mechanism dominating durable consumption decisions. When credit shocks are concurrent with a large negative productivity shock, the aggregate consumption dynamics provide a better fit to the Great Recession than the standard specification. Household specific credit terms also introduce substantial state dependency into the response of the economy to shocks, as not only the distribution of assets matter but also the distribution of credit terms, which moves over time due to the history of aggregate shocks. Surprisingly, aggregate credit conditions are not amenable to policy intervention. Government intervention to relax credit conditions and reduce market incompleteness results in a decline in consumer welfare.