Using data from the annual Dutch National Bank Household Survey, this paper investigates how income shocks shape consumption dynamics over the business cycle, in particular during the global financial crisis (2008-2009) and the sovereign debt crisis (2011-2013).
During the global financial crisis, negative income shocks were relatively small and transitory: however, in the presence of high income uncertainty, Dutch households still saved more and consumed less. During the sovereign debt crisis, the contraction in consumption was even more pronounced, as it was triggered by larger and permanent negative income shocks, especially for the younger cohorts, together with a precautionary reason for saving.
