A Model of Expenditure Shocks
37 Pages Posted: 27 Sep 2019 Last revised: 6 Jan 2020
Date Written: January 3, 2020
We document four features of consumption and income microdata: 1) household-level consumption is as volatile as household income on average, 2) household-level consumption has a positive but small correlation with income, 3) many low-wealth households have marginal propensities to consume near zero, and 4) lagged high expenditure is associated with low contemporaneous spending propensities. Our interpretation is that household expenditure depends on time-varying consumption thresholds where marginal utility discontinuously increases. Our model with consumption thresholds matches the four facts better than does a standard model. Poor households in our model also exhibit “excess sensitivity” to anticipated income declines.
Keywords: Consumption, Expenditure Shocks, Household Debt
JEL Classification: D14, E21
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