Working Paper: NBER ID: w27917
Authors: Rafael Guntin; Pablo Ottonello; Diego Perez
Abstract: We study crises characterized by large adjustments of aggregate consumption through their microlevel patterns. We show that leading theories designed to explain aggregate consumption dynamics differ markedly in their cross-sectional predictions. While theories based on financial frictions predict that rich households with liquid assets should be able to smooth consumption during bad times, neoclassical theories predict that these agents would optimally adjust their consumption if crises severely affect their permanent income. Using microlevel data on several episodes of large aggregate-consumption adjustment, we document that rich households significantly adjust consumption relative to their income, consistent with the permanent-income hypothesis of consumption during crises. We discuss our findings' implications for the effectiveness of stabilization policies that target consumption during crises.
Keywords: Consumption; Crisis; Permanent Income Hypothesis; Financial Frictions
JEL Codes: E21; E60; F41; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rich households adjust their consumption significantly relative to their income (E21) | contradicting the financial frictions view (G19) |
| permanent income hypothesis aligns with the observed consumption adjustments during crises (E21) | rich households exhibit high consumption-income elasticities (D12) |
| shocks to permanent income (E39) | dynamics of aggregate consumption (E21) |
| consumption-income elasticities for rich households do not differ significantly from those of poorer households (D12) | challenging the notion that financial frictions primarily drive consumption dynamics (E21) |