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Journal Article
Econ Focus: Adjusting to Income Risk
A common question in economics and finance is how households respond to changes in income risk. Theory predicts that when households' incomes become more volatile, they may save more, work more, or reduce their holdings of risky assets to compensate for their increased risk.In a recent article in the Review of Economic Dynamics, Marios Karabarbounis of the Richmond Fed, Yongsung Chang and Jay Hong of Seoul National University, Yicheng Wang of Peking University, and Tao Zhang of the Ragnar Frisch Centre for Economic Research examined how households adjust their financial portfolio in response ...
Working Paper
Response of Consumer Debt to Income Shocks: The Case of Energy Booms and Busts
Local shocks in oil and gas development may lead consumers to increase their spending. Using quarterly information on consumer debt and oil and gas activity between 2000 and 2016, I find that consumer debt increased at a peak of $840 per capita, equivalent to 1.7 percent of median household income in counties with shale endowment and increased drilling. Shocks to local wages via drilling revealed a marginal propensity to consume from debt of 0.45. Relative to areas with oil and gas development experience, the marginal propensity to consume was 70 percent larger in previously undeveloped ...
Report
How Do Households Respond to Income Shocks?
We use panel data from the Italian Survey of Household Income and Wealth from 1991 to 2016 to document empirically what components of the household budget constraint change in response to shocks to household labor income, both over shorter and over longer horizons. We show that shocks to labor income are associated with negligible changes in transfers and non-labor income components, modest changes in consumption expenditures, and large changes in wealth. We then split the sample in households which do not own business or real estate wealth, and households who do. For the first group, we find ...
Working Paper
Rational but Not Prescient: Borrowing during the Fracking Boom
To study how income expectations affect borrowing, we use leased natural gas rights in Texas in the mid-2000s, which created potential for future leaseholder income without loosening credit constraints. In matching 11,000 leaseholders with non-leaseholders selected from a screened pool of 5.2 million, we find that the average leaseholder borrowed $13,000 more over the 2003–08 leasing boom. A consumption-smoothing modelindicates that leaseholders’ income expectations aligned with forecasts of persistently high natural gas prices. Yet, the unforeseeable success of fracking was associated ...
Working Paper
Borrowing Based on Great Expectations: Evidence from the Origins of Fracking
We use the origins of fracking to study how people respond to a large and uncertain permanent income shock. Following the arrival of news in 2003 that fracking was commercially viable, the average person owning rights to natural gas deposits in the Barnett Shale could plausibly expect to earn a present value of about $33,000 from leasing the rights to energy firms. Anticipating the income, people who signed leases after 2006 borrowed $5,400 more than non-leaseholders as of 2006. Leases not yet signed could not be collateralized, suggesting that expectations of increased permanent income ...
Working Paper
Dissecting Idiosyncratic Earnings Risk
This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) ...
Working Paper
Dissecting Idiosyncratic Earnings Risk
This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) ...
Working Paper
The Causes of Household Bankruptcy: The Interaction of Income Shocks and Balance Sheets
We examine how household balance sheets and income statements interact to affect bankruptcy decisions following an exogenous income shock. For identification, we exploit government payments in one but not any other Canadian province that varied exogenously based on family size. Receiving a larger income shock from the payment (relative to household income) reduces the count of bankruptcies, with fewer remaining filers having higher net balance sheet benefits of bankruptcy (unsecured debt discharged minus liquidated assets forgone). Receiving an income shock thus causes households that would ...
Working Paper
Dissecting Idiosyncratic Earnings Risk
This paper examines whether nonlinear and non-Gaussian features of earnings dynamics are caused by hours or hourly wages. Our findings from the Norwegian administrative and survey data are as follows: (i) Nonlinear mean reversion in earnings is driven by the dynamics of hours worked rather than wages since wage dynamics are close to linear, while hours dynamics are nonlinear—negative changes to hours are transitory, while positive changes are persistent. (ii) Large earnings changes are driven equally by hours and wages, whereas small changes are associated mainly with wage shocks. (iii) ...