Consumption Volatility, Liquidity Constraints and Household Welfare

What is it about?

The study shows how higher income instability for many families, combined with inadequate access to credit, led to larger unplanned changes in family consumption. Households headed by black or Hispanic individuals, single parents or those with fewer than 13 years of education were particularly hard hit, which suggests that improving access to credit for disadvantaged groups (or providing them with other ways to smooth their consumer spending) could significantly improve family wellbeing.

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Why is it important?

Households’ inability to borrow and smooth consumption indicates that their wellbeing was adversely affected. Our’ calculations suggest that the costs of the increase in consumption variability were substantial: reducing volatility to 1980 levels would produce the same welfare gain as increasing average household annual consumption by 3%. At the same time, reducing consumption volatility for the average black or Hispanic household to the level experienced by the average white household would provide the same welfare gain as increasing annual consumption by 7%.