Working Paper: CEPR ID: DP7680
Authors: Tullio Jappelli; Luigi Pistaferri
Abstract: We review different empirical approaches that researchers have taken to estimate how consumption responds to income changes. We critically evaluate the empirical evidence on the sensitivity of consumption to predicted income changes, distinguishing between the traditional excess sensitivity tests, and the effect of predicted income increases and income declines. We also review studies that attempt to estimate the marginal propensity to consume out of income shocks, distinguishing between three different approaches: identifying episodes in which income changes unexpectedly, relying on the covariance restrictions that the theory imposes on the joint behavior of consumption and income growth, and combining realizations and expectations of income or consumption in surveys where data on subjective expectations are available.
Keywords: Consumption Smoothing
JEL Codes: D91; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unanticipated income shocks (G59) | consumption (E21) |
| permanent income shocks (G59) | consumption (E21) |
| transitory income shocks (J69) | consumption (E21) |
| liquidity constraints (E41) | asymmetric responses to income shocks (H31) |
| negative transitory shocks (E39) | consumption decrease (E21) |
| positive transitory shocks (E32) | consumption response (D12) |
| unexpected income changes (E25) | marginal propensity to consume (E21) |
| unemployment insurance (J65) | consumption smoothing (D15) |