Consumption-Wealth Comovement of the Wrong Sign
31 Pages Posted: 16 Apr 2004
Date Written: May 12, 2006
An unexpected wealth windfall should increase consumption shortly after the windfall is received. We test this prediction using administrative records on over 40,000 401(k) accounts. Contrary to theory, we estimate a negative short-run marginal propensity to consume out of idiosyncratic 401(k) capital gains shocks. These results cannot be interpreted as standard intertemporal substitution, since the idiosyncratic returns we study do not predict future returns. Instead, our findings imply that many investors are influenced by a positive feedback effect, through which higher recent returns encourage higher short-run saving.
Keywords: Savings, wealth shocks, retirement
JEL Classification: G10, E21
Suggested Citation: Suggested Citation