Estimating Consumption Responses to Income Shocks of Different Persistence Using Self‐Reported Income Measures

23 Pages Posted: 26 May 2016

See all articles by Merike Kukk

Merike Kukk

Tallinn University of Technology (TUT) - Department of Finance and Economics

Dmitry Kulikov

Bank of Estonia

Karsten Staehr

Tallinn University of Technology (TUT) - Department of Finance and Economics; Bank of Estonia

Date Written: June 2016

Abstract

Models of intertemporal consumption choice posit that consumption reacts more strongly to income shocks with persistent effects than to shocks with temporary effects. This prediction is tested using data from the Estonian Household Budget Surveys for 2002–07. Questions in the survey make it possible to distinguish between two income components of different persistence, using the individual households’ subjective income classification. Estimations confirm that households distinguish income components of different persistence and react to these differently; the consumption response to income shocks with persistent effects is significantly higher than the response to shocks with only temporary effects. Further analysis reveals, however, that consumption also reacts to lagged shocks to temporary income even when the households are not liquidity constrained, suggesting that their behavior is not fully consistent with the standard forward‐looking unconstrained consumption models.

Keywords: consumption smoothing, excess smoothness, income persistence, income shock, intertemporal consumption allocation, self‐insurance

JEL Classification: D12, D91, E21, R22

Suggested Citation

Kukk, Merike and Kulikov, Dmitry and Staehr, Karsten, Estimating Consumption Responses to Income Shocks of Different Persistence Using Self‐Reported Income Measures (June 2016). Review of Income and Wealth, Vol. 62, Issue 2, pp. 311-333, 2016, Available at SSRN: https://ssrn.com/abstract=2784061 or http://dx.doi.org/10.1111/roiw.12163

Merike Kukk (Contact Author)

Tallinn University of Technology (TUT) - Department of Finance and Economics ( email )

Akadeemia tee 3
Tallinn, 12618
Estonia

Dmitry Kulikov

Bank of Estonia ( email )

Estonia Building 13
15095 Tallinn
Estonia

Karsten Staehr

Tallinn University of Technology (TUT) - Department of Finance and Economics ( email )

Akadeemia tee 3-486
Tallinn, 12618
Estonia

HOME PAGE: http://www.ttu.ee/karsten-staehr

Bank of Estonia ( email )

Estonia Building 13
Tallinn, 15095
Estonia

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