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Consumption sensitivities in Estonia: income shocks of different persistence

Author

Listed:
  • Merike Kukk
  • Dmitry Kulikov
  • Karsten Staehr

Abstract

The Permanent Income Hypothesis (PIH) entails that consumption reacts more strongly to persistent than to temporary income shocks. This prediction is tested using data from the Estonian Household Budget Surveys for 2002-2007. The dataset contains questions which make it possible to distinguish between persistent and temporary income shocks based on the households' own assessment. The estimations confirm that the marginal propensities to consume out of the two income shocks differ, households are forward-looking and seek to smooth consumption. Moreover, the estimated propensities of persistent shocks are of reasonable magnitudes, consistent with the PIH. Further analysis reveals, however, features that are in breach of the PIH. The consumption estimations are affected by lagged temporary income shocks. When income shocks are decomposed into positive and negative values, there is evidence of excess sensitivity to positive temporary shocks.

Suggested Citation

  • Merike Kukk & Dmitry Kulikov & Karsten Staehr, 2012. "Consumption sensitivities in Estonia: income shocks of different persistence," Bank of Estonia Working Papers wp2012-3, Bank of Estonia, revised 01 Mar 2012.
    • Handle: RePEc:eea:boewps:wp2012-3
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    File URL: http://www.eestipank.ee/sites/eestipank.ee/files/publication/en/WorkingPapers/2012/_wp_312.pdf
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    Citations

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    Cited by:

    1. Netsunajev, Aleksei, 2013. "Reaction to technology shocks in Markov-switching structural VARs: Identification via heteroskedasticity," Journal of Macroeconomics, Elsevier, vol. 36(C), pages 51-62.
    2. Ardo Hansson & Martti Randveer, 2013. "Economic adjustment in the Baltic Countries," Bank of Estonia Working Papers wp2013-1, Bank of Estonia.
    3. Merike Kukk & Karsten Staehr, 2014. "Income underreporting by households with business income: evidence from Estonia," Post-Communist Economies, Taylor & Francis Journals, vol. 26(2), pages 257-276, June.
    4. Kukk, Merike, 2016. "How did household indebtedness hamper consumption during the recession? Evidence from micro data," Journal of Comparative Economics, Elsevier, vol. 44(3), pages 764-786.
    5. Merike Kukk & Karsten Staehr, 2014. "Identification of Income Underreporting by the Self-Employed: Employment Status or Reported Business Income?," TUT Economic Research Series 8, Department of Finance and Economics, Tallinn University of Technology.
    6. Victoria Kudaisi, Bosede & Akanni Olomola, Philip, 2021. "Effects Of Income Shock On Consumption Among Public Workers In Southwest Nigeria: Evidence From The 2016-2018 Economic Crisis," Ilorin Journal of Economic Policy, Department of Economics, University of Ilorin, vol. 8(2), pages 65-88, June.
    7. Merike Kukk & Dmitry Kulikov & Karsten Staehr, 2016. "Estimating Consumption Responses to Income Shocks of Different Persistence Using Self-Reported Income Measures," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(2), pages 311-333, June.
    8. Egert Juuse & Rainer Kattel, 2014. "Financialisation and the Financial and Economic Crises: The Case of Estonia," FESSUD studies fstudy20, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.

    More about this item

    Keywords

    consumption; Permanent Income Hypothesis; income persistence; consumption smoothing; rule-of-thumb consumption;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • R22 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Other Demand

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