Short-Run Income Shocks and Long-Run Distortions in Household Investments

Abstract

We show that short-run income shocks can create surprisingly long-run distortions in household investment behavior. Using transaction-level data, we find that households deposit significantly less money into their brokerage accounts for at least two years after a transitory unemployment shock compared to before. This response is stronger for larger shocks and among more constrained households, and driven more by changes in active rather than passive brokerage flows. In particular, deposits remain persistently lower after a household has missed out on higher stock market returns during an unemployment shock. On the other hand, we do not find similar effects for consumption or savings. Overall..