Consumption-Wealth Comovement of the Wrong Sign

Abstract:     
An unexpected wealth windfall should increase consumption shortly after the windfall is received. We test this prediction using administrative records on over 40,000 401(k) accounts. Contrary to theory, we estimate a negative short-run marginal propensity to consume out of idiosyncratic 401(k) capital gains shocks. These results cannot be interpreted as standard intertemporal substitution, since the idiosyncratic returns we study do not predict future returns. Instead, our findings imply that many investors are influenced by a positive feedback effect, through which higher recent returns encourage higher short-run saving.

Number of Pages in PDF File: 31

Keywords: Savings, wealth shocks, retirement

JEL Classification: G10, E21

working papers series