This post was written by Liam Delaney
A topic that perhaps deserves more discussion is whether/how households are actually smoothing consumption throughout this recession, particularly where one or more household member has been laid off or had substantial reductions in salary and hours. There are many dozens of papers that one could cite in developing some ideas in this area. Two papers below have particularly interested me as I have been thinking about this. The first looks at the extent to which increased debt payments interfere with consumption smoothing. The second looks at the extent to which consumers can maintain welfare by cutting back on durable expenditure while maintaining non-durable consumption. In an optimistic version of the Irish economy, people who have been made unemployed may be able to smooth through the current period by (i) using savings (ii) using redundancy payments (iii) delaying durable expenditure (iv) using extra time available to seek lower prices (v) taking advantage of generally lower prices economy wide (vi) working with financial institutions to restructure their debt payments (vii) switching more to domestic production e.g. making sandwiches rather than buying lunch in a cafe (viii) using informal bartering as a method of acquiring services (ix) borrowing from relatives (x) social welfare (xi) income insurance (xii) charity. I am sure readers can think of many other ways in which people who have been laid off are trying to smooth consumption. We have never had high unemployment in Ireland coinciding with very high levels of personal debt and, as such, relying on previous Irish research is not likely to be very informative as to the welfare issues at stake here. The previous discussion on price indices is clearly relevant but a wider discussion of the role of formal and informal institutions in consumption smoothing in this new environment would be interesting.