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The effect of self-reported transitory income shocks on household spending

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  • John Sabelhaus
  • Samuel Ackerman
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    Abstract

    We use repeated cross-sections of the Survey of Consumer Finances (SCF) to study the effect of self-reported transitory income shocks on household food spending. The self-reported shocks in the SCF are derived from survey questions about the gap between actual and "normal" income. This approach stands in contrast to existing income shock measures in the literature, which are generally derived from the residuals of estimated earnings or income equations. Although the self-reported transitory shocks could potentially give very different answers, the overall variance and asymmetry of shocks over the business cycle are similar to those of existing residual-based estimates. Engel Curve analysis shows a significant relationship between self-reported income shocks and household food spending, though the estimated spending responses are only a small part of the substantial slowdown in the growth rate of food consumption observed during the recent economic downturn.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-64.

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    Date of creation: 2012
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    Handle: RePEc:fip:fedgfe:2012-64

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    1. Carroll, Christopher D., 2009. "Precautionary saving and the marginal propensity to consume out of permanent income," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 780-790, September.
    2. Blundell, Richard & Low, Hamish & Preston, Ian, 2011. "Decomposing Changes in Income Risk Using Consumption Data," IZA Discussion Papers 6125, Institute for the Study of Labor (IZA).
    3. Jason DeBacker & Bradley Heim & Vasia Panousi & Ivan Vidangos, 2011. "Rising inequality: transitory or permanent? New evidence from a U.S. panel of household income 1987-2006," Finance and Economics Discussion Series 2011-60, Board of Governors of the Federal Reserve System (U.S.).
    4. Mariacristina De Nardi & Eric French & David Benson, 2012. "Consumption and the Great Recession," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 1-16.
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