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A Model of Expenditure Shocks

Jorge Miranda-Pino, Daniel Murphy, Kieran Walsh and Eric Young ()
Authors registered in the RePEc Author Service: Jorge Miranda-Pinto ()

No 202004, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We document four features of consumption and income microdata: (1) household-level consumption is as volatile as household income on average, (2) household-level consumption has a positive but small correlation with income, (3) many low-wealth households have marginal propensities to consume near zero, and (4) lagged high expenditure is associated with low contemporaneous spending propensities. Our interpretation is that household expenditure depends on time-varying consumption thresholds where marginal utility discontinuously increases. Our model with consumption thresholds matches the four facts better than does a standard model. Poor households in our model also exhibit “excess sensitivity” to anticipated income declines.

Keywords: E21; D14 (search for similar items in EconPapers)
Pages: 47
Date: 2020-02-04
New Economics Papers: this item is included in nep-mac and nep-upt
Note: This paper was previously circulated under the title “Saving-Constrained Households.”
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DOI: 10.26509/frbc-wp-202004

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Handle: RePEc:fip:fedcwq:87435