SLIDE 1 The American Consumer: Reforming, or Just Resting?
Christopher Carroll1 Jirka Slacalek2
1Johns Hopkins and NBER 2European Central Bank
May 31, 2009
SLIDE 2 Household Net Worth and Its Components
Figure: Wealth Components as a Ratio to Disposable Income
−2 2 4 6 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Net Worth Tangible Assets Financial Assets Liabilities
SLIDE 3 A Simple Buffer Stock Model
Figure: Consumption Function and Target Wealth Ratio
Sustainable
SLIDE 4 A Wealth Shock
Figure: Consumption Function and Target Wealth Ratio
Sustainable
t1 Wealth Shock Target
SLIDE 5 Unemployment Expectations
Figure: Household Expectations Of Improving Unemployment Conditions
40 60 80 100 120 140 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Source: University of Michigan Survey of Consumers
SLIDE 6
Unemployment Expectations – Theory
Figure: Consumption Function Drops When u Risk Rises
Sustainable after unemployment rate increase Target
SLIDE 7 Debt Growth
Figure: Growth of Household Net Borrowing (as a % disposable income)
−5 5 10 15 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
SLIDE 8
A Relaxation of Borrowing Constraints – Theory
Figure: Effect on Consumption Of A Relaxation of Borrowing Constraints
Orig Target Orig
SLIDE 9 Senior Loan Officers’ Survey Measure of Credit Tightening
Figure: Fraction of Banks Tightening Mortgage Lending Terms
−20 50 100 1990 1995 2000 2005 Mortgages (All) Mortgages (Prime) Mortgages (Nontraditional) Mortgages (Subprime)
Source: Federal Reserve Survey of Senior Loan Officers
SLIDE 10 The Effect
Figure: Retail Sales, Current and Previous Recessions
90 100 110 120 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
SLIDE 11
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) ∆Ct = χEt−2∆Ct−1 + εt χ ≈ 0.75
MPC out of Wealth
◮ ∂Ct = α0 + α∂Bt−1 ◮ Immediate MPC: α/χ ◮ Eventual MPC: ¯
κ = α χ(1 − χ)
◮ ¯
κ ≈ 0.06 for total B, 0.05 for financial, 0.09 for housing
SLIDE 12
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) ∆Ct = χEt−2∆Ct−1 + εt χ ≈ 0.75
MPC out of Wealth
◮ ∂Ct = α0 + α∂Bt−1 ◮ Immediate MPC: α/χ ◮ Eventual MPC: ¯
κ = α χ(1 − χ)
◮ ¯
κ ≈ 0.06 for total B, 0.05 for financial, 0.09 for housing
SLIDE 13
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) ∆Ct = χEt−2∆Ct−1 + εt χ ≈ 0.75
MPC out of Wealth
◮ ∂Ct = α0 + α∂Bt−1 ◮ Immediate MPC: α/χ ◮ Eventual MPC: ¯
κ = α χ(1 − χ)
◮ ¯
κ ≈ 0.06 for total B, 0.05 for financial, 0.09 for housing
SLIDE 14
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) ∆Ct = χEt−2∆Ct−1 + εt χ ≈ 0.75
MPC out of Wealth
◮ ∂Ct = α0 + α∂Bt−1 ◮ Immediate MPC: α/χ ◮ Eventual MPC: ¯
κ = α χ(1 − χ)
◮ ¯
κ ≈ 0.06 for total B, 0.05 for financial, 0.09 for housing
SLIDE 15
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) ∆Ct = χEt−2∆Ct−1 + εt χ ≈ 0.75
MPC out of Wealth
◮ ∂Ct = α0 + α∂Bt−1 ◮ Immediate MPC: α/χ ◮ Eventual MPC: ¯
κ = α χ(1 − χ)
◮ ¯
κ ≈ 0.06 for total B, 0.05 for financial, 0.09 for housing
SLIDE 16
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) ∆Ct = χEt−2∆Ct−1 + εt χ ≈ 0.75
MPC out of Wealth
◮ ∂Ct = α0 + α∂Bt−1 ◮ Immediate MPC: α/χ ◮ Eventual MPC: ¯
κ = α χ(1 − χ)
◮ ¯
κ ≈ 0.06 for total B, 0.05 for financial, 0.09 for housing
SLIDE 17
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) ∆Ct = χEt−2∆Ct−1 + εt χ ≈ 0.75
MPC out of Wealth
◮ ∂Ct = α0 + α∂Bt−1 ◮ Immediate MPC: α/χ ◮ Eventual MPC: ¯
κ = α χ(1 − χ)
◮ ¯
κ ≈ 0.06 for total B, 0.05 for financial, 0.09 for housing
SLIDE 18
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) ∆Ct = χEt−2∆Ct−1 + εt χ ≈ 0.75
MPC out of Wealth
◮ ∂Ct = α0 + α∂Bt−1 ◮ Immediate MPC: α/χ ◮ Eventual MPC: ¯
κ = α χ(1 − χ)
◮ ¯
κ ≈ 0.06 for total B, 0.05 for financial, 0.09 for housing
SLIDE 19
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
SLIDE 20
Assumptions about Wealth Components
Forecasting period 50 100 150 200 Year 2000 thousand dollars 2007 2008 2009 2010 2011 Time Tot W Base Tot W Pess Tot W Opt HW Base HW Pess HW Opt FW All
SLIDE 21
Projected Consumption Paths
Forecasting period 26.5 27 27.5 28 Year 2000 thousand dollars 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
SLIDE 22
Projected Saving Rates
−2 2 4 6 Year 2000 thousand dollars 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
SLIDE 23 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
- f 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.
