A Model of Expenditure Shocks
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
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)
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Note: This paper was previously circulated under the title “Saving-Constrained Households.”
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