Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 144 Studies Say 'Probably Not'

Tomas Havranek and Anna Sokolova

Review of Economic Dynamics, 2020, vol. 35, 97-122

Abstract: We show that three factors combine to explain the mean magnitude of excess sensitivity reported in studies estimating the consumption response to income changes: the use of macro data, publication bias, and liquidity constraints. When micro data are used, publication bias is corrected for, and households under examination have substantial liquidity, the literature implies little evidence of deviations from consumption smoothing. The result holds when we control for 45 additional variables reflecting the methods employed by researchers and use Bayesian model averaging to account for model uncertainty. The estimates produced by this literature are also systematically affected by the size of the change in income and the chosen measure of consumption. (Copyright: Elsevier)

Keywords: Excess sensitivity; Marginal propensity to consume; Rule-of-thumb consumers; Liquidity constraints; Publication bias (search for similar items in EconPapers)
JEL-codes: C83 D12 E21 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (101)

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DOI: 10.1016/j.red.2019.05.004

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