Consumption Responses to a Large Shock to Financial Wealth: Evidence from Italy

We estimate marginal propensities to consume from wealth shocks. We exploit large asset-price shocks in 2007-2008 and household-level panel data to implement instrumental variables. A euro fall in risky financial wealth resulted in cuts in annual total (non-durable) consumption of 8.5-9 (5.5-5.7) cents, with small effects on food spending. Effects seem stronger for lower-wealth or indebted households, but significant responses from wealthier households and those without mortgages are important for our baseline results. Counterfactuals indicate financial-wealth effects were relatively important for consumption falls in 2007/08 Italy. The estimated effects are consistent with a simulated lifecycle model capturing the wealth shock.