The effect of wealth on consumption is an issue of long-standing interest to economists.  Conventional wisdom suggests that fluctuations in household wealth have driven major swings in economic activity both in the United States and abroad. This paper considers the so-called consumption wealth effects. There is an extensive existing literature on wealth effects that has yielded some insights. For example, research has documented the relationship between aggregate household wealth and aggregate consumption over time, and a large number of household-level studies suggest that wealth effects are larger for households facing credit constraints. However, there are also many unresolved issues regarding the influence of household wealth on consumption. We review the most important of these issues and argue that there is a need for much more research in these areas as well as better data sources for conducting such analysis.

Using a representative longitudinal survey of U.S. households, we find that household income became noticeably more volatile between the early 1970s and the late 2000s despite the moderation seen in aggregate economic activity during this period. We estimate that the standard deviation of percent changes in household income rose about 30 percent between 1971 and 2008. This widening in the distribution of percent changes was concentrated in the tails. The share of households experiencing a 50 percent plunge in income over a two-year period climbed from about 7 percent in the early 1970s to more than 12 percent in the early 2000s before retreating to 10 percent in the run-up to the Great Recession. Households’ labor earnings and transfer payments have both become more volatile over time. As best we can tell, the rise in the volatility of men’s earnings appears to owe both to greater volatility in earnings per hour and in hours worked.

This paper examines inflation dynamics in the United States since 1960, with a particular focus on the Great Recession. A puzzle emerges when Phillips curves estimated over 1960–2007 are used to predict inflation over 2008–10: inflation should have fallen by more than it did. We resolve this puzzle with two modifications of the Phillips curve, both suggested by theories of costly price adjustment: we measure core inflation with the weighted median of consumer price inflation rates across industries, and we allow the slope of the Phillips curve to change with the level and variance of inflation. We then examine the hypothesis of anchored inflation expectations. We find that expectations have been fully “shock-anchored” since the 1980s, while “level anchoring” has been gradual and partial, but significant. It is not clear whether expectations are sufficiently anchored to prevent deflation over the next few years. Finally, we show that the Great Recession provides fresh evidence against the New Keynesian Phillips curve with rational expectations.

It is time to commit to a future housing finance system for the United States as the current uncertainty surrounding this issue is likely deterring the recovery of the housing market and the broader economy. Returning to the system in place before the financial crisis is not a suitable option, as the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac created significant problems that contributed to the financial crisis. The GSEs’ pre-crisis activities also left the taxpayers with an enormous burden: As of early 2011, more than $100 billion had been put toward rescuing the GSEs and estimates suggest the total cost may be up to several times that when all is said and done.

In this paper, we discuss the weaknesses of the pre-crisis GSE model and lay out the broad outlines of a new housing finance model that attempts to address these problems. The new system includes a limited government role of providing credit guarantees for qualifying mortgage securities in normal times that becomes more expansive in times of mortgage market distress. It also attempts to reduce the incentives for excessive risk-taking embedded in the old system. This feature is essential to creating a stable and robust mortgage finance system, which, over the long run, can help foster economic growth.

A large literature has documented an increase in income equality in the United States over the past several decades (see, for example, David H. Autor, Lawrence F. Katz, and Melissa S. Kearney 2006). At the same time, real aggregate income has risen markedly, and most socioeconomic groups have experienced at least some rise in real purchasing power. Standard models of consumption, which typically assume that an individual’s utility is based only on her own consumption, would predict that these gains have led to higher levels of happiness for all groups, albeit with greater increases for some more than others. Economists have long recognized, however, that an individual’s utility may depend not only on the level of her own consumption but also on how that level compares with the consumption of others. If preferences are characterized by such “external habits,” then the observed widening of the income distribution may have implications for the happiness of different groups that go beyond those associated with the changes in their respective incomes.

This study combines data from two sources to document the evolution of reported levels of happiness for different socioeconomic groups over the past 25 years and to explore whether those levels have been affected by the changing relative position of these groups within the income distribution. We find that people’s happiness appears to depend positively on how well their group is doing relative to the average in their geographic area, even after controlling for the level of their own income. This result is consistent with evidence in earlier work by Erzo F. P. Luttmer (2005) and Ravina (2005). In addition, we find some evidence that the relationship is much stronger for people whose group has above-average income than for people whose group has below-average income. It would thus appear that relative concerns do not become an issue until a person has attained a certain place within the income distribution.

This paper examines precautionary behavior by relating job-loss risk to household net worth. We use existing best practice and some new strategies to deal with some problematic issues inherent in this literature regarding proxying uncertainty, instrumentation, and incorporating theoretical restrictions. We do not find precautionary variation in the wealth holdings of households with low permanent income, but do find precautionary effects for moderate and higher-income households. When the dependent variable is total net worth, these findings are robust to several alternative specifications. But we do not find precautionary responses in subaggregates of wealth that exclude home equity.

Finance companies are important providers of credit to households and businesses. For households, they originate loans and leases to finance the purchase of consumer goods such as automobiles, furniture, and household appliances; they also extend personal cash loans and loans secured by junior liens on real estate, such as home equity loans. For businesses, they supply short- and intermediate-term credit (including leases) for such purposes as the purchase of equipment and motor vehicles and the financing of inventories.

With roughly $1 trillion in financial assets as of mid-2000, the finance company sector occupies an intermediate position among the sectors that typically lend to households and businesses: In terms of assets, it is more than twice as large as the credit union sector, about the same size as the thrift sector, but only about one-fifth as large as the commercial banking sector. The approximately 1,000 companies that make up the sector (down from about 1,200 in 1996) range in size from very small to very large and include the ''captive'' subsidiary finance companies of motor vehicle manufacturers. The companies tend to be diversified, with more than 90 percent of the sector's assets as of mid-2000 held by companies that did not concentrate in any one type of receivable. The larger firms are more likely to be diversified; of the small firms that specialize, most focus on short- and intermediate-term business receivables. The sector is quite concentrated, and has been for some time, with the twenty largest companies accounting for more than two-thirds of total receivables (see box "Industry Concentration'').

The Federal Reserve System has surveyed the assets and liabilities of finance companies at roughly five-year intervals since 1955. The surveys provide benchmarks for the System's monthly report on the outstanding accounts receivable of finance companies and provide a comprehensive update on these companies' sources of funds. This information in turn becomes an important input to the estimates of total consumer credit and the U.S. flow of funds accounts produced at the Federal Reserve Board. Summarized in this article are the results of the most recent survey, which collected finance company balance sheet information as of June 30, 2000. (Details on sampling procedures are given in appendix A, and complete balance sheet data are provided in table B.1.)