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A Model of Expenditure Shocks

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Abstract

We document four features of consumption and income microdata: (1) household-level consumption is as volatile as household income on average, (2) household-level consumption has a positive but small correlation with income, (3) many low-wealth households have marginal propensities to consume near zero, and (4) lagged high expenditure is associated with low contemporaneous spending propensities. Our interpretation is that household expenditure depends on time-varying consumption thresholds where marginal utility discontinuously increases. Our model with consumption thresholds matches the four facts better than does a standard model. Poor households in our model also exhibit “excess sensitivity” to anticipated income declines.

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  • Jorge Miranda-Pino & Daniel Murphy & Kieran Walsh & Eric Young, 2020. "A Model of Expenditure Shocks," Working Papers 20-04, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwq:87435
    DOI: 10.26509/frbc-wp-202004
    Note: This paper was previously circulated under the title “Saving-Constrained Households.”
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    1. Daniel J. Lewis & Davide Melcangi & Laura Pilossoph, 2019. "Latent Heterogeneity in the Marginal Propensity to Consume," Staff Reports 902, Federal Reserve Bank of New York.
    2. Miranda-Pinto, Jorge & Murphy, Daniel & Walsh, Kieran James & Young, Eric R., 2023. "Saving constraints, inequality, and the credit market response to fiscal stimulus," European Economic Review, Elsevier, vol. 151(C).
    3. Auerbach, Alan J. & Gorodnichenko, Yuriy & Murphy, Daniel, 2021. "Inequality, fiscal policy and COVID19 restrictions in a demand-determined economy," European Economic Review, Elsevier, vol. 137(C).
    4. Auerbach, Alan & Gorodnichenko, Yuriy & McCrory, Peter B. & Murphy, Daniel, 2022. "Fiscal multipliers in the COVID19 recession," Journal of International Money and Finance, Elsevier, vol. 126(C).

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    Keywords

    ; D14;

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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