Working Paper: NBER ID: w9976
Authors: Melvin Stephens Jr.
Abstract: Whether households smooth' consumption in response to predictable changes in income is an open and contentious question. This paper examines the consumption reaction to predictable increases in discretionary income following the final payment of a vehicle loan. Using data from the Consumer Expenditure Survey, the results show that a 10 percent increase in discretionary income due to a loan repayment leads to a 2 to 3.5 percent increase in non-durable consumption. Additional analysis suggests that these findings may be explained by the presence of borrowing constraints.
Keywords: No keywords provided
JEL Codes: D91
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 10 percent increase in discretionary income (D12) | 2 to 3.5 percent increase in nondurable consumption (D12) |
| increased discretionary income (D12) | changes in consumption (D12) |
| increased discretionary income (D12) | borrowing constraints affect consumption smoothing (D15) |