Merike Kukk

Income underreporting by households with business income: evidence from Estonia

This article estimates the extent of income underreporting by households with business income relative to households of wage earners in Estonia. It uses a modified version of the methodology pioneered by Pissarides and Weber. The extent of income underreporting is estimated by comparing food Engel curves for households with and without reported business income. The baseline result is that the reported total income of households with business income above 20% of total income must be multiplied by 2.6 in order to attain the same propensity to food consumption as households of wage earners. In this sense, households with business income underreport 62% of their ‘true’ total income. Households with reported business income above 0 but below 20% also underreport income but to a lesser extent. The estimates are higher than those found for developed countries but consistent with other studies of unreported activities in transition countries.

How did household indebtedness hamper consumption during the recession? Evidence from micro data

The paper investigates the extent to which household indebtedness suppressed consumption during the economic downturn in 2008-2009. The paper uses a unique quarterly panel dataset containing financial information on over 100,000 individuals. The dataset covers the period 2005-2011, when there were large changes in credit volumes, income and consumption in Estonia, a new EU member country. The estimations show that indebtedness measured by the debt-to-income ratio and the debt service ratio hampers consumption over the whole business cycle. The negative impact of the debt service ratio is, however, substantially stronger during the recession than in the pre-crisis and post-crisis periods, while the negative effect of the debt-to-income ratio shows a weakening trend over the sample period. The findings suggest that household indebtedness is amplifying the recession and the debt repayment burden indicates the mechanism which is at work.

Enhanced Fiscal Governance in the European Union: The Fiscal Compact

Abstract Several reforms aiming to strengthen budgetary discipline in the European Union have been implemented since the outbreak of the European debt crisis. Arguably the most important one is the Fiscal Compact, which stipulates that each signatory country must enshrine in domestic legislation an upper limit on the structural budget deficit, that is, the deficit after cyclical and other temporary factors have been excluded. This paper analyses the contents of the Fiscal Compact and discusses challenges for its implementation and efficacy. The conclusion is that the Fiscal Compact may be challenging to implement and enforce because the rules are very complex and require complicated calculations that are subject to very large forecasting uncertainty. The Fiscal Compact could, however, lead to a stronger national commitment to fiscal prudence.

Identification of Households Prone to Income Underreporting Employment Status or Reported Business Income

Pissarides and Weber propose using data on income and food consumption for estimating the extent of income underreporting by the self-employed, a group seen to be prone to income underreporting. This paper is the first to investigate the importance of the way in which these households are identified in such analyses. Using household budget data from Estonia, different ways are used to identify households prone to income underreporting and to estimate the extent of the underreporting. The share of unreported income is estimated to be substantially larger when underreporting households are identified using their share of reported business income than when they are identified using their employment status. Further analysis combines the different identification methods and reveals that the employment status provides no information on underreporting when the share of business income is taken into account. The share of reported business income is the most informative indicator of underreporting.

Estimating Consumption Responses to Income Shocks of Different Persistence Using Self-Reported Income Measures

Models of intertemporal consumption choice posit that consumption reacts more strongly to income shocks with persistent effects than to shocks with temporary effects. This prediction is tested using data from the Estonian Household Budget Surveys for 2002–07. Questions in the survey make it possible to distinguish between two income components of different persistence, using the individual households’ subjective income classification. Estimations confirm that households distinguish income components of different persistence and react to these differently; the consumption response to income shocks with persistent effects is significantly higher than the response to shocks with only temporary effects. Further analysis reveals, however, that consumption also reacts to lagged shocks to temporary income even when the households are not liquidity constrained, suggesting that their behavior is not fully consistent with the standard forward‐looking unconstrained consumption models.

How does household debt affect financial asset holdings? Evidence from euro area countries

Purpose The paper aims to investigate the impact of financial liabilities on households’ holdings of financial assets. The debt-to-income ratio of the household sector increased from 75 per cent in 2000 to 99 per cent in 2010 in the euro area on average, and the rapid accumulation of household debt has induced the need to study how indebtedness affects the behaviour of households beyond their borrowing decisions. Design/methodology/approach The paper uses the first wave of the Household Finance and Consumption Survey from 2009-2010 covering euro area countries. The paper estimates a system of equations for households’ financial liabilities and assets, taking account of endogeneity and selection bias. Findings The results indicate that higher household liabilities are related to lower holdings of financial assets. The results are confirmed by a large number of robustness tests. The findings support the hypothesis that credit availability reduces precautionary savings as income shocks can be smoothed by borrowing, meaning fewer assets are held for self-insurance against consumption risk. Practical implications The results are obtained from a recession period when households faced aggregate shocks, whereas credit constraints were tighter than during good times. The implications of lower incentives to keep financial assets by indebted households is that they are actually more vulnerable to aggregate shocks, as they have fewer resources available when they are hit by a negative shock. Originality/value This is the first paper to investigate the effect of liabilities on financial assets using household level data. The paper takes a holistic view and models financial assets and liabilities jointly while controlling for endogeneity and selection bias.

Macroeconomic Factors in the Dynamics of Corporate and Household Saving: Evidence from Central and Eastern Europe

Abstract This article uses panel data estimations on annual data from 10 Central and Eastern European countries to assess the effect of different macroeconomic variables on the dynamics of corporate and household saving. The analyses show that changes in the macroeconomic environment affect the saving rates in both sectors, but with marked differences across the two sectors. The differences are most pronounced for the output gap, the real interest rate, the inflation rate, and the current account balance. Some variables, including the unemployment rate and changes in the real exchange rate, are unimportant in both sectors. The different results for the two sectors underscore the importance of analyzing the factors driving the dynamics of corporate and household saving separately.