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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Quake + Yi;t + 
Xi;t + ei;t 
I ci;t is non-durable consumption expenditures by household i in 
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I Quake is a dummy...
Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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1HSs +
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I ci;t is the log of non-durable consumption expenditures by 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 
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Antonio Acconcia, Giancarlo Corsetti and Saverio Simonelli. CONSUMPTION, LIQUIDITY AND PUBLIC TRANSFERS: EVIDENCE FROM ITALIAN QUAKES

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Bank of Estonia
Tallinn - August 19, 2014

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Antonio Acconcia, Giancarlo Corsetti and Saverio Simonelli. CONSUMPTION, LIQUIDITY AND PUBLIC TRANSFERS: EVIDENCE FROM ITALIAN QUAKES

  1. 1. 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 Bank Tallin - August 19, 2014 1 / 33
  2. 2. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions Introduction to recent micro-literature on fiscal multiplier I Many recent papers exploit quasi-experiment and micro- or local data to study the transmission of fiscal policy I Multipliers of fiscal spending at local level (Nakamura Steinsson, ACS, Shoag, Chodorow-Reich, Serrato and Wingender,Clemens and Miran etc.) I Main motivation: assess the effect of public spending controlling for national monetary policy and budget policy (local spending not financed with local taxes). I Main results: with some exception, local multiplier is found to be around 1.5. I Key question: what do we learn about the true equilibrium multiplier? I This crucially depends on monetary policy and budget policy. I An important answer: theoretical and empirical evidence on specific transmission channels. Open research directions. 2 / 33
  3. 3. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions The earthquake paper: the question I Households with a positive net wealth should be in a position to smooth consumption in the face of temporary income (employment) and expenditure shocks. I Yet, ability to do so is heavily conditioned by the liquidity of their portfolios—i.e. the overall costs of extracting fungible cash from their assets. See recent studies on wealthy-hand-to-mouth e.g. Kaplan and Violante I Goal of the paper: contribute empirical micro-evidence on the consumption effects of transfers whose main effect is that of raising households’ liquidity. 3 / 33
  4. 4. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions The earthquake paper: empirical strategy Earthquakes as quasi-experiments have two key advantages 1. Public programmes typically aim to provide upfront cash to homeowners, who are relatively wealthy but may not be liquid, to finance the costs of fixing quake related damages to their housing units. Since the transfers are set in proportion to estimates of these costs, they can be thought of as a loan to households against anticipated expenditure: their potential effect on consumption is likely to reflect primarily a rise in the current liquidity of the households’ portfolios. 2. Size of the transfers. 4 / 33
  5. 5. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions The earthquake paper: empirical strategy (cont.) I Main case study: (a) the 1980 earthquake in Campania and Basilicata I 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 transfer programme 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 than cash transfers (to finance repair work) 5 / 33
  6. 6. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions Main results I 1980 quake in Southern Italy: Homeowners increase their consumption in the year they have access to transfers (1981 in Campania, 1982 in Basilicata). I Upon cash payment of transfers, current consumption of homeowners rises 30 percent above control group (tenants and homeowners initially excluded from the transfer programme). I 2012 quake in Emilia: Homeowners consumption response is significant if they have a low ratio of liquid wealth to income, and bank debt. I 2009 quake in Abbruzzo: Some evidence that homeowners consumption does not rise if housing repair services are provided in kind, instead of being financed by cash transfers. 6 / 33
  7. 7. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 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 spend around 25% of transfers on non-durable consumption in the quarter they receive it. I Broda-Parker (2012), Souleles (2009) Misra-Surico (2013) ? Evidence that households with a low ratio of liquid assets to income spend at least twice as much as the average household; mortgagors exhibit the largest and most significant response. 7 / 33
  8. 8. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions Data From the Bank of Italy Surveys of Household Income and Wealth (SHIW) in the years 1980-1984, and 2006-2012. I 1980-1984: Repeated cross-sectional data for sample representative of Italian population (about 3,000 households, representative of the Italian population). I 2006-2012: Includes a panel, and better detailed information on households portfolios and mortgages. I Surveys contain microeconomic data (annual frequency) on consumption, after-tax income, as well as information on the households region of residence, the residential status, the number of components, age, education, and employment. 8 / 33
  9. 9. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 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. 9 / 33
  10. 10. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions The economic effects of the 1980 earthquake A quake has contrasting effects on economic activity: destruction of production capacity versus new job opportunities for the reconstruction. These effects led to ambiguous results in the literature. We are able to show the following I 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 10 / 33
  11. 11. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 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 from regressing income on controls for the occupation of the head of household (among others). 11 / 33
  12. 12. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 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 the regression of income on a number of controls for households character-istics. 12 / 33
  13. 13. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions Some evidence on the effects of the quake on income uncertainty (cont.) 13 / 33
  14. 14. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions The effects of the quake on durable consumption: expenditure shock I Even if we detect no fall in the average disposable incomes of residents in the quake area, their average budget may nonetheless suffer because of material damages, that can be interpreted as an exogenous shock to expenditure implied by the quake. I Need to replace furniture and appliances much in advance to their natural wear-and-tear process. I No direct information in survey. Durable consumption only recorded from 1980 on. I Proxy to durable consumption expenditure using the survey item “consumi reali,” which records purchases of furniture, works of art and the like. 14 / 33
  15. 15. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions The effects of the quake on durable consumption: expenditure shock I Calculate the share of households that report a non-zero expenditure for consumi reali, averaged over the years 1977-79 and 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. 15 / 33
  16. 16. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 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—roughly 1/2 of our sample. I Owner- and Non-Owner-occupiers differ in a number of dimensions: I tenants tend to be younger, less educated, more likely to be employed in the manufacturing sector or unemployed. Do not receive reconstruction money, but are also unlikely to be exposed to housing wealth losses. I However, in the aftermath of the quake both groups arguably faced a similar economic environment (for employment and income prospects), and benefitted from common policies aimed to contain the negative consequences of the disaster, including a temporary tax relief. 16 / 33
  17. 17. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions The effects of the quake on non-durable consumption by tenants ci;t = + r + t +
  18. 18. Quake + Yi;t + Xi;t + ei;t I ci;t is non-durable consumption expenditures by household i in year t; I Quake is a dummy that is equal to one in 1981 for the regions hit by the quake. I Xi;t denotes a vector of further control variables (characteristics of the head of the household). 17 / 33
  19. 19. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 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 Age65 1981-83 Quake -0.10 -0.10 -0.12 -0.12 (-2.92) (-3.12) (-3.02) (-3.81) X NO YES YES YES Observations 963 963 809 1508 Control regions are Abruzzo, Molise, Apulia and Calabria. p 0:05, p 0:01, p 0:001 18 / 33
  20. 20. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions Our main question: the effect of transfers on consumption I In January 1981, owner-occupiers of damaged housing units were entitled to transfers to ‘restore habitability’ (Act n. 80 by Special Representative of the Government). I Between 1981-1983, Italian government mobilizes resources for about the 3% of the 1981 GDP of Campania: 75% of this financial support was targeted to rebuild private dwellings (Commissione Parlamentare) ? Per household average: 6 millions of 1981 liras between 1981 and 83 (more than half than yearly income). 19 / 33
  21. 21. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions Our main question: the effect of transfers on consumption (cont.) I Transfers targeted to owner occupiers, in relation to the anticipated cost of repairing quake-related damages of housing units. I Due to randomness in political process, delay in the timing of the payment across two regions: 1. municipalities in Campania immediately included in the programme: 337 initially, 542 out of 549 by May 22, 1981. 2. most municipalities in Basilicata included in the transfer program only in November (Nov 13 1981). 20 / 33
  22. 22. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions The effect of transfers on consumption: econometric model I The empirical model is as follows: ci;t = + t +
  23. 23. 1HSs +
  24. 24. 2TRr;t +
  25. 25. 3 (HSs TRr;t) + Xi;t + ui;t; I ci;t is the log of non-durable consumption expenditures by household i in year t; I t 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). 21 / 33
  26. 26. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions The effect of transfers on consumption: econometric model (cont.) I The variable HS controls for differences in wealth and life-cycle effects between tenants and homeowners. I The variable TR controls for region-specific shocks that may conflate 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 housing damages allows us to capture the effect on consumption of an increase of the degree of liquidity of wealth. 22 / 33
  27. 27. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions The effect of transfers on consumption: econometric model (cont.) I If tenants were dropped from our sample, our empirical specification 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, the empirical model would boil down to a standard diff-in-diff. 23 / 33
  28. 28. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 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 YES Observations 971 971 971 t statistics in parentheses p 0:05, p 0:01, p 0:001 24 / 33
  29. 29. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 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 billions of Italian liras. Allocating 1/3 to each year, we have a total of about 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. 25 / 33
  30. 30. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions The effect of transfers on consumption: evidence (cont.) ? Estimating the marginal propensity to consume out of the transfer (multiplier) I The relative hikes in the consumption of homeowners upon receiving the transfer is about 1 million lira. ? Back of the envelope assessment: out of a yearly transfer of 2.6 million, this is equivalent to a marginal propensity to consume as high as 33%. I Relative to the control group (consumption in part of the control group falls) I Hike in consumption only in one year: consumption falls back to baseline in subsequent years (1982 for Campania homeowners, 1983 for Basilicata homeowners) 26 / 33
  31. 31. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions Other quakes I In our first quasi-experiment, we find that the subsample of owner occupiers entitled to transfers significantly increase their consumption on average. But in principle there could be differences within this group. I In 1980, the Bank of Italy surveys are not detailed enough on the households’ financial positions. I In more recent years, the new, richer surveys by the Bank of Italy allow us to focus sharply on the differential consumption response to stimulus depending on degree of liquidity of wealth. 27 / 33
  32. 32. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions The 2012 quake in Emilia I Strong quake hit an extensive area of the Emilia region (small areas 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 the house; tax credit against yearly cost of bank debt; suspension of mortgage payments. 28 / 33
  33. 33. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions 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 liquid households I Illiquid households: liquid asset below 50% of current income and bank debt (mortgage) 29 / 33
  34. 34. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions The 2012 Quake in Emilia. Homeowners’ Consumption by Degree of Wealth Liquidity ci;t = +
  35. 35. 1ci;t

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