Macroeconomic Disasters and Forward-Looking Consumers: Historical Evidence and Evidence from the Covid-19 Pandemic

Abstract: Macroeconomic disasters (wars, pandemics, depressions) are characterized

by drastic shifts and increased volatility of the aggregate consumption to

income ratio. By standard intertemporal budget constraint logic, this ratio is

linked to expectations of future income and consumption growth rates. We

investigate whether these expectations suffice to explain the shifts in the

consumption-income ratio that occur during disaster periods or whether, on the

other hand, consumers become more forward-looking and therefore give more

weight to these expectations during disaster times. Our theoretical framework

implies that the predictive ability of the current consumption-income ratio for

future income and consumption growth rates is higher during disaster episodes.

We check this both for past disasters and the current Covid-19 pandemic through

the estimation of panel data regressions for industrial economies using

historical annual data (1870-2015) and recent quarterly data (1995Q1-2020Q4).

Our estimations confirm that macroeconomic disasters, contrary to ordinary

recessions, make consumers more forward-looking.

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