Economic shocks and consumption-smoothing strategies of households.

We examine how Peruvian households adjust their consumption in response to economic shocks, employing the weak version of the permanent income hypothesis. We analyze two types of household strategies: those adopted in anticipation of a shock (ex-ante), such as insurance and access to formal credit markets, and those employed after the shock occurs (ex-post). Our findings reveal several key points: i) Peruvian households, on average, manage to smooth their consumption in the face of economic shocks. ii) Consumption smoothing is primarily observed among households with access to formal financial markets, though during the pandemic, households with savings outside the formal system also demonstrated this ability. iii) Households prioritize smoothing consumption in essential categories (food and health) over non-essential ones. iv) We identify eight ex-post strategies that households use to mitigate the impact of shocks. On average, these strategies contribute to consumption smoothing, with multiple jobholding and government transfers being particularly effective. Moreover, our study underscores the variation in consumption-smoothing capabilities among households. High-income households tend to leverage financial instruments more effectively, whereas low-income households have limited access to such instruments, resulting in less effective consumption smoothing.