Household Response to the Economic Crisis Micro-simulation for the Czech Economy

IFC Working Papers No 6
December 2010

Abstract

This paper studies the economic impact of the current global economic downturn on the household sector. Household budgets can be negatively affected by declines in nominal wages and increases in unemployment. We empirically test this effect for the Czech economy. As a result of the lack of individual data on the Czech household finances, micro data are simulated. Our analysis clearly points out that there is a significant additional decline in consumption related to an increase in household default rates. We find that potential household insolvencies have important implications for the financial system as well as for the aggregate economy.