A Model of Expenditure Shocks

47 Pages Posted: 8 Feb 2020

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

University of California, Santa Barbara (UCSB) - Department of Economics

Eric R. Young

University of Virginia

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Date Written: February 2, 2020

Abstract

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.

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 (February 2, 2020). FRB of Cleveland Working Paper No. 20-04, Available at SSRN: https://ssrn.com/abstract=3534151

Jorge Miranda-Pinto

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Daniel Murphy

University of Virginia - Darden School of Business ( email )

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

Kieran James Walsh

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

Santa Barbara, CA

Eric R. Young (Contact Author)

University of Virginia ( email )

1400 University Ave
Charlottesville, VA 22903
United States

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