Working Paper: NBER ID: w1629
Authors: Carl E. Walsh
Abstract: Recent empirical studies have found that consumption is more sensitive to current income than the life-cycle, permanent income hypothesis would predict.The present paper studies a model in which the fraction of consumers exhibiting excess sensitivity is endogenously determined. The presence of income uncertainty and restrictions on borrowing are shown to generate adistribution of consumption across individuals which is consistent with the recent empirical evidence. The aggregate marginal propensity to consume out of transitory income is directly related to the fraction of constrained consumers and exhibits positive serial correlation in the face of serially uncorrelated income shocks.
Keywords: Consumption; Borrowing Constraints; Wealth Constraints; Aggregate Consumption
JEL Codes: E21; D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fraction of constrained consumers (D10) | aggregate marginal propensity to consume (E16) |
| income uncertainty and borrowing restrictions (G51) | distribution of consumption (D39) |
| income shocks (J65) | fraction of wealth-constrained consumers (E21) |
| fraction of wealth-constrained consumers (E21) | consumption distribution (D39) |
| serially uncorrelated income shocks (G59) | serial correlation of constrained consumers (D10) |