Abstract: Macroeconomic disasters (wars, pandemics, depressions) are characterized
by drastic shifts and increased volatility of the aggregate consumption to
income ratio. By standard intertemporal budget constraint logic, this ratio is
linked to expectations of future income and consumption growth rates. We
investigate whether these expectations suffice to explain the shifts in the
consumption-income ratio that occur during disaster periods or whether, on the
other hand, consumers become more forward-looking and therefore give more
weight to these expectations during disaster times. Our theoretical framework
implies that the predictive ability of the current consumption-income ratio for
future income and consumption growth rates is higher during disaster episodes.
We check this both for past disasters and the current Covid-19 pandemic through
the estimation of panel data regressions for industrial economies using
historical annual data (1870-2015) and recent quarterly data (1995Q1-2020Q4).
Our estimations confirm that macroeconomic disasters, contrary to ordinary
recessions, make consumers more forward-looking.
The online brownbag seminar will be chaired by Dirk Schindler.
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