Dr. Colman and I have completed our research.
The results of our standard OLS regression, conformed to what we hypothesized: that when leverage increases, the amount of money spent on food for consumption at home increases, as eating at restaurants is seen as a luxury good. In addition, measures of durable consumption also responded as hypothesized, as leverage increased, it was found that households are less likely to have purchased newer vehicles within the past two years, and the 2013 dollar value of the vehicles in the home also declines.
We did find something that was not quite expected. Those households that are headed by an adult aged 64 or over, appear to be insensitive to the presence of leverage when making non-durable consumption decisions. Those households actually increased their expenditures on food purchased at restaurants as their leverage ratio increased. This is somewhat counter-intuitive and perplexing.
This project has been wonderful. It is great that Pace emphasizes the benefits of being able to collaborate with faculty. Dr. Colman and I work well together, and I have benefitted from his experience and mentorship during the UGR program.
Dr. Colman and I have just about finished our research! We just had a successful presentation of the preliminary results at the Eastern Economics Association on Friday February 27th. We did face several challenges a long the way, not only in terms of changing our topic midstream, but also in terms of formatting our data successfully in statistical program STATA.
Our preliminary findings suggest that our hypotheses were correct, and that the presence of leverage does decrease durable consumption expenditures among households, and it does influence their decision of whether or not to consume food at home or at restaurants. We plan on devoting the rest of the semester to examining our secondary findings, in terms of demographic variables and specific households that may warrant debt-relief assistance or financial literacy. We also plan to look into younger households more closely, as they have increased their leverage substantially over the past twenty-five years. We theorize this is the result of a rapid increase in the cost of higher-education, and we are eager to look at this issue more closely.
Dr. Colman and I decided to shift gears in our research, and rather than pursue the tertiary effects of the Affordable Care Act on household formation, we are instead pursuing research into the household de-leveraging process among income levels. De-leveraging is a reduction in debt-burdens, such as by paying off one’s debt. This is a good thing, however when households choose to deleverage rather than consume goods and services, economic growth slows.
Households also have different spending habits depending on their income level. The wealthier are said to have a lower marginal propensity to consume, and prefer to save more. Whereas lower income households will spend more of each dollar they earn, and save less.
The Great Recession was a balance sheet recession, and we saw deleveraging taking place among all income levels. But has that changed? Recent research from the Federal Reserve suggests that the deleveraging process might be officially over. Dr. Colman and I want to see if this is the case, or if perhaps deleveraging has only ended among higher income levels, which might be restraining consumption spending in the near-term.
We are using data from the Survey of Consumer Finances & the Panel Study of Income Dynamics. Preliminary testing suggests that the wealthier may have finished deleveraging, and this has accounted for the muted patterns in consumption spending we have seen lately. This means that lower and middle income households still need to deleverage, and once they do, we should consumption spending and economic growth to pick up further!
The Undergraduate Research Program gives me the opportunity to study an important topic in macroeconomics. Young adults have historically been active in the market for homes. The Patient Protection & Affordable Care Act’s (PPACA) dependent coverage provision (DCP), allows young adults up to age 28 to stay on their dependent’s health plans if the insurance company offers them, Dr. Colman and I suspect this might alter the rate of household formation amongst younger adults.
To that end, Dr. Colman and myself are researching this theory to determine if indeed it does, and to what effect, and what might be the ramifications going forward for the housing sector.
To determine this we will use an econometric technique known as ‘difference-in-differences’ which is used to the effects of a ‘treatment’ or an independent variable, on two groups, one control, and one exposed to the treatment variable. We will be utilizing data from the National Institutes of Health Survey compiled by the CDC. The survey has a response rate of nearly 90%, making it an adequate cross-section of the United States.
This project grants me a unique opportunity to participate in research that might ordinarily be conducted at the post-graduate level and will serve as excellent preparation for graduate study in economics.