antonio acconcia, giancarlo corsetti and saverio simonelli. consumption, liquidity and public...

Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions

CONSUMPTION, LIQUIDITY AND PUBLIC

TRANSFERS: EVIDENCE FROM ITALIAN

QUAKES

Antonio Acconcia, Giancarlo Corsetti and Saverio Simonelli

Estonia Central BankTallin - August 19, 2014

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Introduction to recent micro-literature on fiscal multiplier

I Many recent papers exploit quasi-experiment and micro- or localdata to study the transmission of fiscal policy

I Multipliers of fiscal spending at local level (Nakamura Steinsson,ACS, Shoag, Chodorow-Reich, Serrato and Wingender,Clemensand Miran etc.)

I Main motivation: assess the effect of public spending controllingfor national monetary policy and budget policy (local spendingnot financed with local taxes).

I Main results: with some exception, local multiplier is found tobe around 1.5.

I Key question: what do we learn about the true equilibriummultiplier?

I This crucially depends on monetary policy and budget policy.

I An important answer: theoretical and empirical evidence onspecific transmission channels. Open research directions.

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The earthquake paper: the question

I Households with a positive net wealth should be in a position tosmooth consumption in the face of temporary income(employment) and expenditure shocks.

I Yet, ability to do so is heavily conditioned by the liquidity oftheir portfolios — i.e. the overall costs of extracting fungiblecash from their assets. See recent studies onwealthy-hand-to-mouth e.g. Kaplan and Violante

I Goal of the paper: contribute empirical micro-evidence on theconsumption effects of transfers whose main effect is that ofraising households’ liquidity.

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The earthquake paper: empirical strategy

Earthquakes as quasi-experiments have two key advantages

1. Public programmes typically aim to provide upfront cash tohomeowners, who are relatively wealthy but may not be liquid,to finance the costs of fixing quake related damages to theirhousing units.Since the transfers are set in proportion to estimates of thesecosts, they can be thought of as a loan to households againstanticipated expenditure: their potential effect on consumption islikely to reflect primarily a rise in the current liquidity of thehouseholds’ portfolios.

2. Size of the transfers.

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The earthquake paper: empirical strategy (cont.)

I Main case study:

(a) the 1980 earthquake in Campania and BasilicataI Extension and robustness:

(b) the 2012 quake in Emilia

(c) the 2009 quake in Abruzzo (L’Aquila)

? in (a) one region (Basilicata) is included in the transferprogramme with a delay

? in (b) and (c) we have measures of households’liquid-wealth-to-income

? with (c) transfer in kind (housing repair services) rather thancash transfers (to finance repair work)

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Main results

I 1980 quake in Southern Italy: Homeowners increase theirconsumption in the year they have access to transfers (1981 inCampania, 1982 in Basilicata).

I Upon cash payment of transfers, current consumption ofhomeowners rises 30 percent above control group (tenants andhomeowners initially excluded from the transfer programme).

I 2012 quake in Emilia: Homeowners consumption response issignificant if they have a low ratio of liquid wealth to income,and bank debt.

I 2009 quake in Abbruzzo: Some evidence that homeownersconsumption does not rise if housing repair services are providedin kind, instead of being financed by cash transfers.

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Literature

I Kaplan and Violante (2014)I Agarwal-Liu-Souleles (2007), Johnson-Parker-Souleles

(2006,2009), Parker-Souleles-Johnson-McClelland (2013),Shapiro-Slemrod (2009).

? Evidence from the US stimulus suggests that households spendaround 25% of transfers on non-durable consumption in thequarter they receive it.

I Broda-Parker (2012), Souleles (2009) Misra-Surico (2013)

? Evidence that households with a low ratio of liquid assets toincome spend at least twice as much as the average household;mortgagors exhibit the largest and most significant response.

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Data

From the Bank of Italy Surveys of Household Income andWealth (SHIW) in the years 1980-1984, and 2006-2012.

I 1980-1984: Repeated cross-sectional data for samplerepresentative of Italian population (about 3,000 households,representative of the Italian population).

I 2006-2012: Includes a panel, and better detailed information onhouseholds portfolios and mortgages.

I Surveys contain microeconomic data (annual frequency) onconsumption, after-tax income, as well as information on thehouseholds region of residence, the residential status, the numberof components, age, education, and employment.

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Main case study: The 1980 earthquake in South of Italy

I Major earthquake hitting a large area over two regions,Campania and Basilicata, with 5 million inhabitants.

I About 3500 fatalities and 9500 injured.I 120,000 buildings either collapsed or were seriously damaged.

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The economic effects of the 1980 earthquake

A quake has contrasting effects on economic activity: destruction ofproduction capacity versus new job opportunities for thereconstruction. These effects led to ambiguous results in the literature.

We are able to show the followingI Increase in income uncertainty (average disposable income

actually rises)I Shock to durable expenditure, impinging on real incomes (not

shown in the following)I Drop in consumption by tenants, excluded from the transfer

programme

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Some evidence on the effects of the quake on income uncertainty

Ex-post variability in income as a proxy for ex-ante uncertainty(Dardanoni, 1991):

I Variability of income or variability of the residuals fromregressing income on controls for the occupation of the head ofhousehold (among others).

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Some evidence on the effects of the quake on income uncertainty (cont.)

Quake Area Control Area Quake Area Control Area

F 3.19 0.33 4.02 0.50(0.000) (0.000) (0.000) (0.000)

W0 15.74 30.18 15.67 1.98(0.000) (0.000) (0.00) (0.159)

W50 13.48 16.77 12.32 1.55(0.000) (0.000) (0.000) (0.216)

Controls No No Yes Yes

Note: The table shows results of tests on equality of variability of in-come, comparing 1981, the year just after the earthquake, with 1980.Columns under the headings Control are based on OLS residuals of theregression of income on a number of controls for households character-istics.

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Some evidence on the effects of the quake on income uncertainty (cont.)

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The effects of the quake on durable consumption: expenditure shock

I Even if we detect no fall in the average disposable incomes ofresidents in the quake area, their average budget may nonethelesssuffer because of material damages, that can be interpreted as anexogenous shock to expenditure implied by the quake.

I Need to replace furniture and appliances much in advance totheir natural wear-and-tear process.

I No direct information in survey. Durable consumption onlyrecorded from 1980 on.

I Proxy to durable consumption expenditure using the survey item“consumi reali,” which records purchases of furniture, works ofart and the like.

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The effects of the quake on durable consumption: expenditure shock

I Calculate the share of households that report a non-zeroexpenditure for consumi reali, averaged over the years 1977-79and 1981-83. This share:

I falls in the control group (national) from 10 to 7.5 percent.I increases in the quake area, from 9 to 12.5 percent (a +50% in

relative terms).I The rise is stronger for owner-occupiers than for tenants.

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The effects of the quake on non-durable consumption by tenants

I To assess the response of households’ consumption to the quake,we focus on the subsample of non owner-occupiers — roughly1/2 of our sample.

I Owner- and Non-Owner-occupiers differ in a number ofdimensions:

I tenants tend to be younger, less educated, more likely to beemployed in the manufacturing sector or unemployed. Do notreceive reconstruction money, but are also unlikely to be exposedto housing wealth losses.

I However, in the aftermath of the quake both groups arguablyfaced a similar economic environment (for employment andincome prospects), and benefitted from common policies aimedto contain the negative consequences of the disaster, including atemporary tax relief.

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The effects of the quake on non-durable consumption by tenants

ci,t = α+ αr + λt + β × Quake + δYi,t + γXi,t + ei,t

I ci,t is non-durable consumption expenditures by household i inyear t;

I Quake is a dummy that is equal to one in 1981 for the regions hitby the quake.

I Xi,t denotes a vector of further control variables (characteristicsof the head of the household).

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The effects of the quake on non-durable consumption by tenants (cont.)

Non-owner occupiers in Campania vs the rest of Italy

(1) (2) (3) (4)1980-81 1980-81 Age<65 1981-83

Quake -0.10∗∗ -0.10∗∗ -0.12∗∗ -0.12∗∗∗

(-2.92) (-3.12) (-3.02) (-3.81)X NO YES YES YESObservations 963 963 809 1508

Control regions are Abruzzo, Molise, Apulia and Calabria.∗ p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001

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Our main question: the effect of transfers on consumption

I In January 1981, owner-occupiers of damaged housing unitswere entitled to transfers to ‘restore habitability’ (Act n. 80 bySpecial Representative of the Government).

I Between 1981-1983, Italian government mobilizes resources forabout the 3% of the 1981 GDP of Campania:

75% of this financial support was targeted to rebuild privatedwellings (Commissione Parlamentare)

? Per household average: 6 millions of 1981 liras between 1981and 83 (more than half than yearly income).

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Our main question: the effect of transfers on consumption (cont.)

I Transfers targeted to owner occupiers, in relation to theanticipated cost of repairing quake-related damages of housingunits.

I Due to randomness in political process, delay in the timing of thepayment across two regions:

1. municipalities in Campania immediately included in theprogramme: 337 initially, 542 out of 549 by May 22, 1981.

2. most municipalities in Basilicata included in the transferprogram only in November (Nov 13 1981).

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The effect of transfers on consumption: econometric model

I The empirical model is as follows:

ci,t = α+ λt + β1HSs + β2TRr,t + β3 (HSs · TRr,t) + γXi,t + ui,t,

I ci,t is the log of non-durable consumption expenditures byhousehold i in year t;

I λt is a year fixed effect;I HSs (Housing Status) is a dummy equal to one if owner occupier;I TRr,t (Transfer Region) is a dummy equal to one in the year t

when the region of residence r is included in the programme;I Xi,t denotes a vector of further control variables (head of

household characteristics).

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The effect of transfers on consumption: econometric model (cont.)

I The variable HS controls for differences in wealth and life-cycleeffects between tenants and homeowners.

I The variable TR controls for region-specific shocks that mayconflate with the effects of liquidity transfers.

I The interaction HS*TR:1. Under the (realistic) assumption that housing wealth is illiquid,2. since cash transfers are effectively a loan: made accessible in

advance to finance the anticipated cost of repairing housingdamages

allows us to capture the effect on consumption of an increase ofthe degree of liquidity of wealth.

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The effect of transfers on consumption: econometric model (cont.)

I If tenants were dropped from our sample, our empiricalspecification would be similar to Johnson et al. (2006, 2009),Parker et al. (2013).

I If we focused on each of the two regions in isolation, theempirical model would boil down to a standard diff-in-diff.

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The effect of transfers on consumption: evidence

(1) (2) (3)HS × TR 0.18∗∗ 0.12∗ 0.12∗

(2.68) (2.23) (2.50)

HS 0.03 -0.15∗∗∗ -0.10∗∗∗

(0.74) (-4.86) (-3.48)

TR -0.08∗ -0.09∗∗ -0.08(-2.02) (-2.72) (-1.96)

Income 0.57∗∗∗ 0.34∗∗∗

(21.04) (10.69)X NO NO YESObservations 971 971 971

t statistics in parentheses∗ p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001

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The effect of transfers on consumption: evidence (cont.)

? Estimating the 1981 transfer for private reconstruction

• The total transfer for the earthquake in 1981-83 was 5.7 billionsof Italian liras. Allocating 1/3 to each year, we have a total ofabout 2 billion liras per year.

• With roughly 700,000 owner occupiers in the quake area =>about 6 million liras per household entitled to the transfers.

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The effect of transfers on consumption: evidence (cont.)

? Estimating the "marginal propensity to consume out of thetransfer (multiplier)"

I The relative hikes in the consumption of homeowners uponreceiving the transfer is about 1 million lira.

? Back of the envelope assessment: out of a yearly transfer of 2.6million, this is equivalent to a marginal propensity to consume ashigh as 33%.

I Relative to the control group (consumption in part of the controlgroup falls)

I Hike in consumption only in one year: consumption falls back tobaseline in subsequent years (1982 for Campania homeowners,1983 for Basilicata homeowners)

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Other quakes

I In our first quasi-experiment, we find that the subsample ofowner occupiers entitled to transfers significantly increase theirconsumption on average. But in principle there could bedifferences within this group.

I In 1980, the Bank of Italy surveys are not detailed enough on thehouseholds’ financial positions.

I In more recent years, the new, richer surveys by the Bank of Italyallow us to focus sharply on the differential consumptionresponse to stimulus depending on degree of liquidity of wealth.

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The 2012 quake in Emilia

I Strong quake hit an extensive area of the Emilia region (smallareas in Lombardia and Veneto) on May 20 and 29, 2012.

I 27 fatalities; 11,000 damaged houses.I Central government channeled 2.4 billion of euros to support

house repairing activities.I Main instruments:

bank loans guaranteed by the state to cover the damages of thehouse; tax credit against yearly cost of bank debt;suspension of mortgage payments.

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The 2012 quake in Emilia (cont.)

I Focus on the ‘panel’ in the SHIW for the years 2008-2010-2012(so to control for unobserved household-specific features).

I Run the estimation model separate for illiquid and liquidhouseholds

I Illiquid households: liquid asset below 50% of current incomeand bank debt (mortgage)

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The 2012 Quake in Emilia.Homeowners’ Consumption by Degree of Wealth Liquidity

∆ci,t = α+ β1∆ci,t−1 + β2∆yi,t + β3Emilia + γXi,t + ui,t

(1) (2) (3) (4) (5)All No Yes No Yes

EMILIA 0.05 0.02 0.24∗∗∗ 0.04 0.26∗∗∗

(1.64) (0.46) (3.74) (1.33) (4.19)Observations 798 634 164 634 164

Control regions are Liguria, Tuscany, Marche and Umbria.No and Yes refer to inclusion of controls.∗ p < 0.05, ∗∗ p < 0.01, ∗∗∗ p < 0.001

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The 2008 quake in Abruzzo (L’Aquila)

I The 2009 L’Aquila earthquake occurred in the region of Abruzzoon 6 April 2009.

I 309 fatalities. 10,000 damaged houses.I The reconstruction cost were reimbursed directly to the

construction company.I Same econometric model as before, but a big CAVEAT regarding

timing: SHIW is run in 2010, not in 2009. So we cannot observethe impact multiplier.

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The 2009 Quake in Abruzzo. Homeowners’ Consumption by Degree ofWealth ‘Liquidity’.

∆ci,t = α+ β1∆ci,t−1 + β2∆yi,t + β3Abruzzo + γXi,t + ui,t

(1) (2) (3) (4) (5)Liquid Illiquid No-Mortage Mortgage Illiq+Mort.

ABRUZZO 0.05 0.05 0.09 -0.03 0.26(0.47) (0.77) (1.72) (-0.19) (1.34)

gy 0.27∗∗∗ 0.13∗∗ 0.19∗∗∗ 0.14 0.16(5.09) (3.08) (4.42) (1.97) (0.88)

Observations 341 522 670 193 76

Control regions are the ones in the Center-South Italy.∗p < 0.05, ∗∗p < 0.01, ∗∗∗p < 0.001

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Conclusions

I We exploit natural disasters as quasi-experiments to provideempirical evidence on the consumption response to cashtransfers by (illiquid) homeowners, that are effectively a loan tohouseholds.

I Transfers not a gift, that the household can allocate amongalternative uses in a discretionary manner. Yet provision of cashin anticipation of expenditure raises household liquidity—agentscan choose to use part of the loan to finance current non-durableexpenditure.

I Using the households excluded from the programme as a controlgroup, we show the homeowners respond to these transfers in aneconomically significant way.

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antonio acconcia, giancarlo corsetti and saverio simonelli. consumption, liquidity and public...

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