A Model of Expenditure Shocks

38 Pages Posted: 27 Sep 2019 Last revised: 7 Dec 2022

See all articles by Jorge Miranda-Pinto

Jorge Miranda-Pinto

University of Queensland

Daniel Murphy

University of Virginia - Darden School of Business

Kieran James Walsh

ETH Zürich - KOF Swiss Economic Institute

Eric R. Young

University of Virginia

Multiple version iconThere are 2 versions of this paper

Date Written: November 20, 2022

Abstract

We document four features of consumption and income in the post-1999 Panel Study of Income Dynamics: 1) household-level consumption is as volatile as household income on average, 2) household-level consumption growth has a positive but small correlation with income growth, 3) consumption growth is strongly negatively autocorrelated, and 4) the cross-sectional correlation between consumption growth and income growth is much lower among households experiencing high consumption (relative to their within-household average). To explain these facts we propose a model in which household expenditure depends on time-varying consumption thresholds where marginal utility discontinuously increases. Our model with consumption thresholds matches the facts better than does a standard model with or without measurement error. Poor households in our model also exhibit “excess sensitivity” to anticipated income declines.

Keywords: Consumption, Expenditure Shocks, Household Debt

JEL Classification: D14, E21

Suggested Citation

Miranda-Pinto, Jorge and Murphy, Daniel and Walsh, Kieran James and Young, Eric R., A Model of Expenditure Shocks (November 20, 2022). Darden Business School Working Paper No. 3455745, Available at SSRN: https://ssrn.com/abstract=3455745 or http://dx.doi.org/10.2139/ssrn.3455745

Jorge Miranda-Pinto

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Daniel Murphy (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Kieran James Walsh

ETH Zürich - KOF Swiss Economic Institute ( email )

Zurich
Switzerland

Eric R. Young

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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