The American Consumer: Reforming, or Just Resting? Christopher - PowerPoint PPT Presentation

The American Consumer: Reforming, or Just Resting? Christopher Carroll 1 Jirka Slacalek 2 1 Johns Hopkins and NBER 2 European Central Bank May 31, 2009

Household Net Worth and Its Components Figure: Wealth Components as a Ratio to Disposable Income 6 4 2 0 −2 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Net Worth Tangible Assets Financial Assets Liabilities

A Simple Buffer Stock Model Figure: Consumption Function and Target Wealth Ratio � � � � Target � Sustainable � � � � � � � � � � � � � �

A Wealth Shock Figure: Consumption Function and Target Wealth Ratio � � � � Target � Sustainable � � � t � 1 � t � Wealth Shock � � � � � � � � � � � � � � t

Unemployment Expectations Figure: Household Expectations Of Improving Unemployment Conditions 140 120 100 80 60 40 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Source: University of Michigan Survey of Consumers

Unemployment Expectations – Theory Figure: Consumption Function Drops When u Risk Rises � Sustainable � � � Target � � � � � � � � � � after unemployment rate increase � � �

Debt Growth Figure: Growth of Household Net Borrowing (as a % disposable income) 15 10 5 0 −5 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

A Relaxation of Borrowing Constraints – Theory Figure: Effect on Consumption Of A Relaxation of Borrowing Constraints � � � Orig � � � � � Orig Target �

Senior Loan Officers’ Survey Measure of Credit Tightening Figure: Fraction of Banks Tightening Mortgage Lending Terms 100 50 0 −20 1990 1995 2000 2005 Mortgages (All) Mortgages (Prime) Mortgages (Nontraditional) Mortgages (Subprime) Source: Federal Reserve Survey of Senior Loan Officers

The Effect Figure: Retail Sales, Current and Previous Recessions 120 110 100 90 0 6 12 18 24 30 36 Months after Start of Recession Historical Range Historical Mean Current Recession Note: Historical Range includes all recessions since November 1948

Estimating Wealth and E [∆ u ] Effects Sluggishness of C Growth ` a la Campbell and Deaton (1989), Constantinides (1990), Rotemberg and Woodford (1997), Fuhrer (2000), Sommer (2002), Carroll, Sommer, and Slacalek (2008) ∆ C t = χ E t − 2 ∆ C t − 1 + ε t χ ≈ 0 . 75 MPC out of Wealth ◮ ∂ C t = α 0 + α∂ B t − 1 ◮ Immediate MPC: α/χ α ◮ Eventual MPC: ¯ κ = χ (1 − χ ) ◮ ¯ κ ≈ 0.06 for total B , 0.05 for financial, 0.09 for housing

Estimating Wealth and E [∆ u ] Effects Sluggishness of C Growth ` a la Campbell and Deaton (1989), Constantinides (1990), Rotemberg and Woodford (1997), Fuhrer (2000), Sommer (2002), Carroll, Sommer, and Slacalek (2008) ∆ C t = χ E t − 2 ∆ C t − 1 + ε t χ ≈ 0 . 75 MPC out of Wealth ◮ ∂ C t = α 0 + α∂ B t − 1 ◮ Immediate MPC: α/χ α ◮ Eventual MPC: ¯ κ = χ (1 − χ ) ◮ ¯ κ ≈ 0.06 for total B , 0.05 for financial, 0.09 for housing

Estimating Wealth and E [∆ u ] Effects Sluggishness of C Growth ` a la Campbell and Deaton (1989), Constantinides (1990), Rotemberg and Woodford (1997), Fuhrer (2000), Sommer (2002), Carroll, Sommer, and Slacalek (2008) ∆ C t = χ E t − 2 ∆ C t − 1 + ε t χ ≈ 0 . 75 MPC out of Wealth ◮ ∂ C t = α 0 + α∂ B t − 1 ◮ Immediate MPC: α/χ α ◮ Eventual MPC: ¯ κ = χ (1 − χ ) ◮ ¯ κ ≈ 0.06 for total B , 0.05 for financial, 0.09 for housing

Estimating Wealth and E [∆ u ] Effects Sluggishness of C Growth ` a la Campbell and Deaton (1989), Constantinides (1990), Rotemberg and Woodford (1997), Fuhrer (2000), Sommer (2002), Carroll, Sommer, and Slacalek (2008) ∆ C t = χ E t − 2 ∆ C t − 1 + ε t χ ≈ 0 . 75 MPC out of Wealth ◮ ∂ C t = α 0 + α∂ B t − 1 ◮ Immediate MPC: α/χ α ◮ Eventual MPC: ¯ κ = χ (1 − χ ) ◮ ¯ κ ≈ 0.06 for total B , 0.05 for financial, 0.09 for housing

Estimating Wealth and E [∆ u ] Effects Sluggishness of C Growth ` a la Campbell and Deaton (1989), Constantinides (1990), Rotemberg and Woodford (1997), Fuhrer (2000), Sommer (2002), Carroll, Sommer, and Slacalek (2008) ∆ C t = χ E t − 2 ∆ C t − 1 + ε t χ ≈ 0 . 75 MPC out of Wealth ◮ ∂ C t = α 0 + α∂ B t − 1 ◮ Immediate MPC: α/χ α ◮ Eventual MPC: ¯ κ = χ (1 − χ ) ◮ ¯ κ ≈ 0.06 for total B , 0.05 for financial, 0.09 for housing

Estimating Wealth and E [∆ u ] Effects Sluggishness of C Growth ` a la Campbell and Deaton (1989), Constantinides (1990), Rotemberg and Woodford (1997), Fuhrer (2000), Sommer (2002), Carroll, Sommer, and Slacalek (2008) ∆ C t = χ E t − 2 ∆ C t − 1 + ε t χ ≈ 0 . 75 MPC out of Wealth ◮ ∂ C t = α 0 + α∂ B t − 1 ◮ Immediate MPC: α/χ α ◮ Eventual MPC: ¯ κ = χ (1 − χ ) ◮ ¯ κ ≈ 0.06 for total B , 0.05 for financial, 0.09 for housing

Estimating Wealth and E [∆ u ] Effects Sluggishness of C Growth ` a la Campbell and Deaton (1989), Constantinides (1990), Rotemberg and Woodford (1997), Fuhrer (2000), Sommer (2002), Carroll, Sommer, and Slacalek (2008) ∆ C t = χ E t − 2 ∆ C t − 1 + ε t χ ≈ 0 . 75 MPC out of Wealth ◮ ∂ C t = α 0 + α∂ B t − 1 ◮ Immediate MPC: α/χ α ◮ Eventual MPC: ¯ κ = χ (1 − χ ) ◮ ¯ κ ≈ 0.06 for total B , 0.05 for financial, 0.09 for housing

Estimating Wealth and E [∆ u ] Effects Sluggishness of C Growth ` a la Campbell and Deaton (1989), Constantinides (1990), Rotemberg and Woodford (1997), Fuhrer (2000), Sommer (2002), Carroll, Sommer, and Slacalek (2008) ∆ C t = χ E t − 2 ∆ C t − 1 + ε t χ ≈ 0 . 75 MPC out of Wealth ◮ ∂ C t = α 0 + α∂ B t − 1 ◮ Immediate MPC: α/χ α ◮ Eventual MPC: ¯ κ = χ (1 − χ ) ◮ ¯ κ ≈ 0.06 for total B , 0.05 for financial, 0.09 for housing

Forecasting Assumptions—2 Models × 3 Scenarios Models ◮ Total Net Worth ◮ Housing and Financial Wealth Separately Scenario Variable 2009 2010 2011 2012 Baseline House Prices − 14 − 4 − − Unemployment Rate 8 . 4 8 . 8 7 . 9 6 . 8 Disposable Income (Per Capita) − 3 . 8 0 . 7 2 . 4 2 . 6 Fed Funds Rate 0 . 3 0 . 9 0 . 9 0 . 9 Inflation − 0 . 7 1 . 6 2 . 2 2 . 2 Population 1 . 1 1 . 1 1 . 1 1 . 1 Implied Per Cap Real HW − 14 . 4 − 6 . 7 2 . 1 2 . 1 Pessimistic House Prices − 22 − 7 − − Unemployment Rate 8 . 9 10 . 3 9 . 1 8 . 2 Implied Per Cap Real HW − 22 . 4 − 9 . 7 2 . 1 2 . 1 Optimistic House Prices − 6 − 1 − − Unemployment Rate 7 . 9 7 . 3 6 . 7 5 . 4 Implied Per Cap Real HW − 6 . 4 − 3 . 7 2 . 1 2 . 1

Assumptions about Wealth Components 200 Forecasting period Year 2000 thousand dollars 150 100 50 0 2007 2008 2009 2010 2011 Time Tot W Base Tot W Pess Tot W Opt HW Base HW Pess HW Opt FW All

Projected Consumption Paths 28 Year 2000 thousand dollars 27.5 Forecasting period 27 26.5 2007 2008 2009 2010 2011 Time Tot W Base Tot W Pess Tot W Opt H&F W Base H&F W Pess H&F W Opt Consensus

Projected Saving Rates 6 Year 2000 thousand dollars 4 2 0 −2 1995 1997 1999 2001 2003 2005 2007 2009 2011 Time Tot W Base Tot W Pess Tot W Opt H&F W Base H&F W Pess H&F W Opt Consensus

Campbell, John Y., and Angus S. Deaton (1989): “Why Is Consumption So Smooth?,” Review of Economic Studies , 56, 357–74. Carroll, Christopher D., Martin Sommer, and Jiri Slacalek (2008): “International Evidence on Sticky Consumption Growth,” Johns Hopkins University Working Paper Number 542 , Available at http://econ.jhu.edu/people/ccarroll/papers/cssIntlStickyC http://econ.jhu.edu/people/ccarroll/papers/cssIntlStickyC.pdf http://econ.jhu.edu/people/ccarroll/papers/cssIntlStickyC.zip . Constantinides, George M. (1990): “Habit Formation: A Resolution of the Equity Premium Puzzle,” Journal of Political Economy , 98(3), 519–543. Fuhrer, Jeffrey C. (2000): “An Optimizing Model for Monetary Policy: Can Habit Formation Help?,” American Economic Review , 90(3). Rotemberg, Julio J., and Michael Woodford (1997): “An Optimization-Based Econometric Model for the Evaluation of Monetary Policy,” in NBER Macroeconomics Annual, 1997 , ed. by Benjamin S. Bernanke, and Julio J. Rotemberg, vol. 12, pp. 297–346. MIT Press, Cambridge, MA. Sommer, Martin (2002): “Habits, Sentiment and Predictable Income in the Dynamics of Aggregate Consumption,” working paper number 458; updated 2006, Johns Hopkins University, Available at http://econ.jhu.edu/pdf/papers/wp458_version2006.pdf .