1) The document discusses three studies that examine the effects of natural disasters (earthquakes) in Italy on household consumption and liquidity. 2) It finds that after the 1980 earthquake in Southern Italy, homeowners who received cash transfers to repair housing damage increased their consumption by 30% compared to tenants who did not receive transfers. 3) Studies of the 2012 earthquake in Emilia and 2009 earthquake in Abruzzo provide additional evidence that cash transfers increase consumption more for homeowners with low liquid assets, while in-kind repairs do not boost consumption as much as cash.

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
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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.
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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.
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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.
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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)
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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.
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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.
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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.
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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.
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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
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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).
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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.
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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.)
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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.
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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.
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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.
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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. 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).
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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
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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).
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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).
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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. 1HSs +

24. 2TRr;t +

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).
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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.
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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.
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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
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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.
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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)
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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.
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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.
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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)
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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. 1ci;t1 +

36. 2yi;t +

37. 3Emilia +
Xi;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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38. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions
The 2008 quake in Abruzzo (L’Aquila)
I The 2009 L’Aquila earthquake occurred in the region of Abruzzo
on 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 observe
the impact multiplier.
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39. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions
The 2009 Quake in Abruzzo. Homeowners’ Consumption by Degree of
Wealth ‘Liquidity’.
ci;t = +

40. 1ci;t1 +

41. 2yi;t +

42. 3Abruzzo +
Xi;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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43. Introduction The 1980 quake Transfers and consumption (R1) Other quakes: 2012 Emilia (R2) 2009 Abruzzo (R3) Conclusions
Conclusions
I We exploit natural disasters as quasi-experiments to provide
empirical evidence on the consumption response to cash
transfers by (illiquid) homeowners, that are effectively a loan to
households.
I Transfers not a gift, that the household can allocate among
alternative uses in a discretionary manner. Yet provision of cash
in anticipation of expenditure raises household liquidity—agents
can choose to use part of the loan to finance current non-durable
expenditure.
I Using the households excluded from the programme as a control
group, we show the homeowners respond to these transfers in an
economically significant way.
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