Heterogeneity and aggregate consumption: An empirical assessment

Davide Debortoli () and Jordi Galí ()
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Davide Debortoli: https://www.upf.edu/web/econ/faculty/-/asset_publisher/6aWmmXf28uXT/persona/id/3419104
Jordi Galí: https://www.upf.edu/web/econ/faculty/-/asset_publisher/6aWmmXf28uXT/persona/id/3418866

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We provide an empirical assessment of a central implication of models with idiosyncratic income risk and incomplete markets: the existence of a role for the distribution of wealth in shaping the dynamics of aggregate consumption. Estimates of consumption Euler equation models extended to include wealth distribution statistics show the latter to have a negligible quantitative impact on aggregate consumption. This contrasts with the important role played by current disposable income, even when we use data for households with (relatively) high liquid wealth. The latter finding suggests the presence of a significant behavioral component behind the high sensitivity of consumption to current income.

Keywords: idiosyncratic income risk; incomplete markets; representative household; HANK models; TANK models (search for similar items in EconPapers)
JEL-codes: E21 E32 (search for similar items in EconPapers)
Date: 2025-03
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