Essays on public and private insurance of income shocks

Defence date: 16 June 2014Examining Board: Professor Árpád Ábrahám, European University Institute (Supervisor); Professor Jérôme Adda, European University Institute; Professor Claudio Michelacci, CEMFI Madrid; Professor Gianluca Violante, New York University.This thesis explores issues related to public and private insurance of income shocks, and the importance of human capital accumulation. The first chapter argues that the intertemporal elasticity of substitution of labor supply is a state-dependent variable which strongly depends on the return to human capital accumulation. Estimating a life cycle model I find that the average i.e.s. is low (0.35), and comparable with micro estimates, even in the presence of human capital. However, the average i.e.s. hides important heterogeneity: for college graduates the i.e.s. more than doubles over the life cycle, whereas it increases by about 58 percent for workers without a college degree. The second chapter argues that heterogeneous returns to human capital accumulation affects the degree to which search effort of unemployed deviates from the socially optimal level, and the reason behind the deviation. I find that (i) the main social costs associated with unemployment insurance are not due to moral hazard problems, but are due to distortionary effects of labor income taxes needed to finance the insurance. (ii) The magnitude of the moral hazard problem and the tax distortion problem differs substantially by age and education. And, (iii) the degree of tax progressiveness and benefit regressiveness has important effects on the deviation of search effort. The third chapter studies the relation between co-movement of income shocks and precautionary asset holdings. If households perceive spousal labor supply as an insurance mechanism, it is evident that this mechanism should work better the lower the co-movement of income shocks. We find that (i) households in which both spouses have the same education level or work in the same industry have a higher correlation of income shocks compared to couples with different education/industry. And, (ii) households who face larger co-movements of income shocks hold larger precautionary buffers

Housing Markets in Scandinavia:Supply, Demand and Regulation

This chapter discusses the recent developments in the housing markets of Scandinavian capital cities and some of the related policy challenges. We briefly review demographic trends, both over the past 10 years and looking ahead, and show that housing supply shortages have been building up, contributing to rising house prices. Drawing on a few recent housing market studies, we go over the observed and likely consequences of housing shortages and house prices rises. Finally, we discuss the geographical mortgage policy implemented in Norway, with a particular focus on restricting mortgage lending in Oslo a year ago.<br/

From a "Critical Interest Burden" to a "Vulnerable Debt Ratio"

The debt ratio, measured as total household debt relative to disposable income, has risen markedly over the past 30 years. Changes in structural factors such as relaxation of credit standards and financial innovation have contributed to this rise. Such factors make it difficult to compare debt ratio levels over time. By utilising historical information on interest burdens, this commentary seeks to shed light on the extent to which the current debt ratio represents a source of vulnerability for the Norwegian economy. The analyses are based on a simple, static stress test of the household interest burden.publishedVersio

From a "Critical Interest Burden" to a "Vulnerable Debt Ratio"

The debt ratio, measured as total household debt relative to disposable income, has risen markedly over the past 30 years. Changes in structural factors such as relaxation of credit standards and financial innovation have contributed to this rise. Such factors make it difficult to compare debt ratio levels over time. By utilising historical information on interest burdens, this commentary seeks to shed light on the extent to which the current debt ratio represents a source of vulnerability for the Norwegian economy. The analyses are based on a simple, static stress test of the household interest burden

Fra en «kritisk rentebelastning» til en «sårbar gjeldsbelastning»

Gjeldsbelastningen, målt som samlet gjeld i husholdningene relativt til disponibel inntekt, har steget markert de siste 30 årene, se figur 1. Endringer i strukturelle forhold som nedbygging av kredittbegrensninger og finansielle innovasjoner har bidratt til utviklingen. Slike forhold gjør det vanskelig å sammenligne nivåene på gjeldsbelastningen over tid. I denne kommentaren ønsker vi å belyse i hvilken grad nivået på dagens gjeldsbelastning utgjør en sårbarhet for norsk økonomi ved å benytte historisk informasjon om rentebelastningen. Analysene bygger på en enkel, statisk stresstest av husholdningenes rentebelastning.publishedVersio

Gir høy gjeldsvekst i oppgangstider større konsumfall i nedgangstider?

Den sterke oppbyggingen av gjeld i forkant av finanskrisen har gitt et fornyet fokus på sammenhengen mellom gjeld og husholdningenes etterspørsel ved tilbakeslag i økonomien. Studier på disaggregerte data finner empirisk støtte for at konsumetterspørselen til husholdninger med høy gjeld responderer sterkere på endringer i inntekt og formue sammenlignet med husholdninger med mindre gjeld. Glick and Lansing (2010) viser tilsvarende at de landene som hadde den største økningen i gjeld før finanskrisen, også opplevde den største økningen i eiendomspriser. De finner også at de samme landene opplevde det største fallet i konsum når boligprisene begynte å falle. I en studie av 14 OECD-land de siste 140 årene finner Jorda et al. (2013) at fallet i BNP gjennom resesjoner er større dersom det har vært en rask oppbygging av gjeld i forkant. I denne kommentaren analyserer vi i hvilken grad det er et systematisk trekk ved resesjoner at sterk vekst i husholdningenes gjeld i forkant av resesjonen forsterker nedgangen i privat konsum under resesjonen. Vi benytter tilsvarende metode som Jorda et al. (2013) på et panel av 64 resesjoner fra 21 land, i perioden fra 1. kvartal 1970 til 4. kvartal 2014.publishedVersio

Does High Debt Growth in Upturns Lead to a More Pronounced Fall in Consumption in Downturns?

The strong accumulation of debt in the period preceding the financial crisis has resulted in a renewed focus on the relationship between debt and household demand in an economic downturn. Studies based on disaggregated data find empirical evidence that consumer demand from highly indebted households responds more strongly to changes in income and wealth compared with that of less indebted households. Glick and Lansing (2010) similarly show that the countries with the largest rise in debt prior to the financial crisis also experienced the strongest rise in real estate prices, and that those same countries experienced the strongest decline in consumption when house prices began to fall. In a study involving 14 OECD countries over the past 140 years, Jorda et al. (2013) find that the fall in GDP during recessions is more pronounced when the crisis is preceded by rapid debt accumulation. In this commentary, we analyse to what extent it is a systematic feature of recessions that strong household debt accumulation preceding a recession amplifies the decline in private consumption during the recession. Our method is similar to that of Jorda et al. (2013), using a panel of 64 recessions in 21 countries in the period between 1970 Q1 and 2014 Q4.publishedVersio

Fra en «kritisk rentebelastning» til en «sårbar gjeldsbelastning»

Gjeldsbelastningen, målt som samlet gjeld i husholdningene relativt til disponibel inntekt, har steget markert de siste 30 årene, se figur 1. Endringer i strukturelle forhold som nedbygging av kredittbegrensninger og finansielle innovasjoner har bidratt til utviklingen. Slike forhold gjør det vanskelig å sammenligne nivåene på gjeldsbelastningen over tid. I denne kommentaren ønsker vi å belyse i hvilken grad nivået på dagens gjeldsbelastning utgjør en sårbarhet for norsk økonomi ved å benytte historisk informasjon om rentebelastningen. Analysene bygger på en enkel, statisk stresstest av husholdningenes rentebelastning

Analyses of Effects of the Residential Mortgage Loan Regulation

This article analyses the effects of the regulation on residential mortgage loans issued in 2017. The analyses are preliminary as tax data for 2017 are not yet available. Residential mortgage loan requirements were laid down in the form of a regulation in 2015 and tightened on 1 January 2017. The current regulation applies until summer 2018.publishedVersio

The Effect of Higher Interest Rates on Household Disposable Income and Consumption - a Static Analysis of the Cash-Flow Channel

Household debt in Norway has risen substantially over the past 15-20 years relative to both disposable income and bank deposits. An increase in interest rates will therefore reduce disposable income for Norwegian households more than previously. Changes in interest rates can have a direct impact on household consumption via changes in disposable income - an effect generally referred to as the cash-flow channel. In this article, we use tax data from Statistics Norway for all Norwegian households in the period between 2004 and 2015 to shed light on how the cash-flow channel has developed over time. In line with developments in net household debt, we find that the cash-flow effect has become stronger in recent years, but that the increase is somewhat smaller than the total increase in net interest expenses in isolation would imply, owing to increased buffers in the form of liquid assets