Three essays in household finance

EUI PhD theses; Department of Economics: http://cadmus.eui.eu//handle/1814/21720This thesis contains three chapters relating to the field of household finance. In the first chapter household life cycle investment behaviour is investigated using a panel of Norwegian administrative data and tax records. Dealing with selection and identification issues, the data suggests a double adjustment as people age: a rebalancing of the portfolio away from stocks as households approach retirement, and a peak in stock market participation around the time when they reach retirement. A theoretical model predicting these life cycle patterns of investment behavior is then provided. This is achieved by extending existing models with a per period participation cost in risky asset markets and a small perceived probability of being cheated. In the second chapter the relation between household financial asset holdings and unemployment is investigated. Consistent with a simple theoretical model, the data shows increased savings and a shift towards safer assets in the years leading up to unemployment, and depletion of savings during unemployment. This suggests that at least some households can foresee and prepare for upcoming unemployment, which indicates that private savings can complement publicly provided unemployment insurance. The final chapter identifies the causal effect of lump-sum severance payments on non-employment duration in Norway by exploiting a discontinuity in eligibility at age 50. A severance payment worth 1.2 months' earnings lowers the fraction re-employed after one year by six percentage points. This effect is decreasing in wealth, which supports the view that the effect of severance pay should be interpreted as evidence of liquidity constraints. Finding liquidity constraints in Norway, despite its equitable wealth distribution and generous welfare state, suggests they are likely to exist also in other countries. Table of Contents: -- 1. Asset market participation and porfolio choice over the life cycle -- 2. Saving and portfolio allocation before and after job loss -- 3. Cash-on-hand and the duration of job search Description: Defence date: 23 April 2012; Examining Board: Professor Luigi Guiso, supervisor, Einaudi Institute for Economics and Finance; Professor Russell Cooper, European University Institute; Professor Monica Paiella, University of Naples “Parthenope”; Professor Kjell Salvanes, Norwegian School of Economics and Business AdministrationpublishedVersio

Debt and Household Consumption Responses

Norwegian households’ levels of housing wealth have since the banking crisis of the 90s become an ever more dominant part of households’ portfolios. Low interest rates and easy access to mortgages have contributed to both increasing house prices and the corresponding increase in household debt. A potential concern for policy makers is how these high debt levels will affect household consumption were the economy to experience a sudden shock, in form of higher unemployment, rising interest rates, falling house prices or a combination of the three. This memo provides an overview of the theoretical implications and the empirical literature on the effects of such shocks on consumption, with an emphasis on heterogeneous responses. We use Norwegian register data on income and wealth to impute measures of consumption for the population and explore differences in consumption rates to gauge the potential impact of such shocks in Norway. We study the role of debt for consumption and find support for the hypothesis that consumption expenditure growth is lower among households with high debt. Much of the leveling off in consumption growth after the crisis reflects a regular response by highly indebted households. Still, a somewhat stronger relationship after the crisis shows that precautionary savings may have played a role

Exchange rate volatility and export performance : evidence from disaggregated Norwegian data

Abstract Ever since the breakdown of the Bretton-Woods agreement in 1971 researchers and policymakers around the world have sought to answer the question whether uncertainty about the movements in the exchange rates affects international trade flows. Even with numerous empirical attempts over the last decades, no consensus seems to be found. This thesis seeks to provide further evidence to the area within the context of a demand type export model, multivariate cointegration techniques and disaggregated data from the Norwegian industry. Applying a measure of exchange rate volatility from a GARCH (Generalized Autoregressive Conditional Heteroskedasticity) model, we find no evidence of any connection between exchange rate volatility and export performance. An important aspect of the analysis is the discussion of the time series properties of the exchange rate volatility measure. We show that our conclusion is unaltered regardless of whether the exchange rate volatility is treated as a stationary or a nonstationary variable. Then, we provide a thorough empirical investigation of an estimated conditional equilibrium correction model (EqCM), which explains the export volume by relative prices and international demand conditions. We demonstrate that the estimated EqCM model is well-specified and reasonably stable in-sample and performs well in an out-of-sample forecasting exercise despite a major monetary policy regime shift in Norway

Asset market participation and portfolio choice over the life-cycle

First published: 20 January 2017Using error-free data on life-cycle portfolio allocations of a large sample of Norwegian households, we document a double adjustment as households age: a rebalancing of the portfolio composition away from stocks as they approach retirement and stock market exit after retirement. When structurally estimating an extended life-cycle model, the parameter combination that best fits the data is one with a relatively large risk aversion, a small per-period participation cost, and a yearly probability of a large stock market loss in line with the frequency of stock market crashes in Norway.Published version of EUI ECO WP 2013/0

Imputing consumption from Norwegian income and wealth registry data

This paper documents a method for computing a longitudinal consumption measure for Norwegian households from administrative records of income and wealth. Data on consumption expenditure of the household is essential in a wide array of economic research. This includes both topics in micro as well as macroeconomics. However, obtaining a consistent and precise measure of household consumption has proven notoriously difficult. This paper documents a method for computing a longitudinal consumption measure for Norwegian households from administrative records of income and wealth. Expenditure surveys tend to suffer from limited sample sizes and underrepresentation of high-income households. Administrative data does not have such limitations and offers a much larger sample with better coverage of all household types. This is particularly useful for improving the measurement of heterogeneity in consumption behavior

Imputing consumption from Norwegian income and wealth registry data

This paper documents a method for computing a longitudinal consumption measure for Norwegian households from administrative records of income and wealth. Data on consumption expenditure of the household is essential in a wide array of economic research. This includes both topics in micro as well as macroeconomics. However, obtaining a consistent and precise measure of household consumption has proven notoriously difficult. This paper documents a method for computing a longitudinal consumption measure for Norwegian households from administrative records of income and wealth. Expenditure surveys tend to suffer from limited sample sizes and underrepresentation of high-income households. Administrative data does not have such limitations and offers a much larger sample with better coverage of all household types. This is particularly useful for improving the measurement of heterogeneity in consumption behavior

Exchange rate volatility and export performance : a cointegrated VAR approach

Abstract: During the last decades Norwegian exporters have ƒ{ despite various forms of exchange rate targeting ƒ{ faced a rather volatile exchange rate which may have influenced their behaviour. Recently, the shift to inflation targeting and a freely floating exchange rate has brought about an even more volatile exchange rate. We examine the causal link between export performance and exchange rate volatility across different monetary policy regimes within the cointegrated VAR framework using the implied conditional variance from a GARCH model as a measure of volatility. Although treating the volatility measure as either a stationary or a non-stationary variable in the VAR, we are not able to find any evidence suggesting that export performance has been significantly affected by exchange rate uncertainty. We find, however, that volatility changes proxied by blip dummies related to the monetary policy change from a fixed to a managed floating exchange rate and the Asian financial crises during the 1990s enter significantly in a dynamic model for export growth ƒ{ in which the level of relative prices and world market demand together with the level of exports constitute a significant cointegration relationship. A forecasting exercise on the dynamic model rejects the hypothesis that increased exchange rate volatility in the wake of inflation targeting in the monetary policy has had a significant impact on export performance. Keywords: Exports, exchange rate volatility, GARCH, CVAR, forecastin