A model of expenditure shocks

Jorge Miranda-Pinto, Daniel Murphy, Kieran James Walsh and Eric R. Young

Journal of Monetary Economics, 2025, vol. 154, issue C

Abstract: We introduce a new quantitative model of household expenditure shocks to rationalize the common anecdote of a low-income and low-liquidity household that uses additional income to save (repay debt) rather than consume. Our model also rationalizes key features of the joint dynamics of household-level consumption and income, including our finding that consumption is volatile yet disconnected from income, especially for households experiencing episodes of high consumption. The key feature of our model is stochastic consumption thresholds that yield large utility costs if violated. The stochastic thresholds increase the welfare cost of income fluctuations by an order of magnitude.

Keywords: Consumption; Expenditure shocks; Household debt (search for similar items in EconPapers)
JEL-codes: D14 E21 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:154:y:2025:i:c:s0304393225000789

DOI: 10.1016/j.jmoneco.2025.103807

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