A Model of Expenditure Shocks
47 Pages Posted: 8 Feb 2020
Date Written: February 2, 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.
JEL Classification: D14, E21
Suggested Citation: Suggested Citation