Heterogeneity of consumption responses to income shocks in the presence of nonlinear persistence

Manuel Arellano, Richard Blundell (), Stéphane Bonhomme and Jack Light

Journal of Econometrics, 2024, vol. 240, issue 2

Abstract: In this paper we use the enhanced consumption data in the Panel Survey of Income Dynamics (PSID) from 2005–2017 to explore the transmission of income shocks to consumption. We build on the nonlinear quantile framework introduced in Arellano et al. (2017). Our focus is on the estimation of consumption responses to persistent nonlinear income shocks in the presence of unobserved heterogeneity. To reliably estimate heterogeneous responses in our unbalanced panel, we develop Sequential Monte Carlo computational methods. We find substantial heterogeneity in consumption responses, and uncover latent types of households with different life-cycle consumption behavior. Ordering types according to their average log-consumption, we find that low-consumption types respond more strongly to income shocks at the beginning of the life cycle and when their assets are low, as standard life-cycle theory would predict. In contrast, high-consumption types respond less on average, and in a way that changes little with age or assets. We examine various mechanisms that might explain this heterogeneity.

Keywords: Nonlinear income persistence; Consumption dynamics; Partial insurance; Heterogeneity; Panel data (search for similar items in EconPapers)
JEL-codes: C23 D31 D91 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Heterogeneity of consumption responses to income shocks in the presence of nonlinear persistence (2024)
Working Paper: Heterogeneity of consumption responses to income shocks in the presence of nonlinear persistence (2023)
Working Paper: Heterogeneity of Consumption Responses to Income Shocks in the Presence of Nonlinear Persistence (2023)
Working Paper: Heterogeneity of Consumption Responses to Income Shocks in the Presence of Nonlinear Persistence (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:240:y:2024:i:2:s0304407623001434

DOI: 10.1016/j.jeconom.2023.04.001

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