The heterogeneous effects of COVID‐19 on Canadian household consumption, debt and savings

In: The Canadian journal of economics: the journal of the Canadian Economics Association = Revue canadienne d'économique, Volume 55, Issue S1, p. 54-87

Abstract

AbstractThis paper develops an agent‐based model to quantify the impact of COVID‐19 on household debt and savings. To build a representative cross‐section of households that vary by income, debt portfolios and consumption baskets, we merge data from the Survey of Household Spending and the Survey of Financial Security. We construct paths for consumption and employment over the crisis, accounting for heterogeneous risk of unemployment across demographics, government transfers, and substitution between expenditure categories that vary in contact intensity. Our model simulations yield a heterogeneous effect of COVID‐19 across the income distribution. Low‐income households face the highest risk of unemployment, but transfers provide generous income replacement. Middle‐income job losers see the fastest rise in debt because transfers only partially replace lost income. Most unplanned savings are accumulated by high‐income households that face lower risk of unemployment and larger declines in hard‐to‐distance spending. We find the rise in savings could generate a brief jump of nearly 6% of monthly consumption.