The Buffer Stock Model and the Aggregate Propensity to Consume

We simulate a buffer stock model of consumption at the individual level, aggregate, and estimate regressions on the aggregated (simulated) data. Regressions of consumption on current (or lagged) disposable labor income—using the simulated data—are used to predict the marginal effect of changing persistence of income shocks or changing aggregate uncertainty (variously defined). Next we estimate a time series model—using observed data—for aggregate disposable labor income for each state. The model allows for varying degrees of persistence and for varying degrees of aggregate uncertainty across states. Finally, we estimate aggregate regressions of consumption on current (or lagged) income, allowing the slope in these regression to depend on persistence and or measures of uncertainty. We find that the effect of persistence very strongly corresponds to that predicted from the model, while the impact of our aggregate measures of uncertainty matches the theoretical model less well