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Heterogeneous response of consumers to income shocks throughout a financial assistance program

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Listed:
  • Fátima Cardoso
  • Manuel Coutinho Pereira
  • Nuno Alves

Abstract

This paper studies the impact on consumption of the large changes in public wages in Portugal arising in the context of the economic and financial assistance program (2011-2014). We uncover the effects of exogenous public wage changes by exploiting the heterogeneous characteristics of public servants by municipality. The initial wage cuts triggered a marked reduction of private consumption, while the reinstatements in the later years gave rise to an increase, albeit of a smaller magnitude. The consumption response was larger for employees with relatively lower wages. Households smoothed the impact on consumption of negative income shocks by drawing down their deposits. Consumer credit did not play such a role, as households deleveraged as a response to those negative shocks.

Suggested Citation

  • Fátima Cardoso & Manuel Coutinho Pereira & Nuno Alves, 2020. "Heterogeneous response of consumers to income shocks throughout a financial assistance program," Working Papers w202018, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w202018
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    References listed on IDEAS

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