The Consumption Response to Income Changes

Tullio Jappelli () and Luigi Pistaferri

No 08-052, Discussion Papers from Stanford Institute for Economic Policy Research

Abstract: We review different empirical approaches that researchers take to estimate how consumption responds to income changes. We critically evaluate the empirical evidence on the sensitivity of consumption to predicted income changes, distinguishing between the traditional excess sensitivity tests, and the effect of predicted income increases and income declines. We also review studies that attempt to estimate the marginal propensity to consume out of income shocks, distinguishing between three different approaches: identifying episodes in which income changes unexpectedly, relying on the covariance restrictions that the theory imposes on the joint behavior of consumption and income growth, and combining realizations and expectations of income or consumption in surveys where data on subjective expectations are available.

Keywords: Consumption smoothing; marginal propensity to consume. (search for similar items in EconPapers)
JEL-codes: D91 E21 (search for similar items in EconPapers)
Date: 2009-08
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Citations: View citations in EconPapers (11)

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Related works:
Journal Article: The Consumption Response to Income Changes (2010)
Working Paper: The Consumption Response to Income Changes (2010)
Working Paper: The Consumption Response to Income Changes (2010)
Working Paper: The Consumption Response to Income Changes (2009)
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