This availability is limited in many European countries and, accordingly, the response of consumption to wealth shocks – the wealth effect – seems to be more modest than in the United States (as much of the literature has found).3 However, in any case, households in many countries may currently find it difficult to smooth consumption because of the combination, size and persistence of the adverse shocks they have recently experienced: significant declines in house and stock prices, negative shocks to labour income and the substantial accumulation of debt.
Much of the evidence available, based on US data,4 suggests that households which had accumulated a large stock of debt before the crisis respond disproportionately to adverse shocks, also because many are endeavouring to deleverage and reduce their debt burdens.