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The Consumption Response to Predictable Changes in Discretionary Income: Evidence from the Repayment of Vehicle Loans

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  • Melvin Stephens Jr.

Abstract

Whether households smooth' consumption in response to predictable changes in income is an open and contentious question. This paper examines the consumption reaction to predictable increases in discretionary income following the final payment of a vehicle loan. Using data from the Consumer Expenditure Survey, the results show that a 10 percent increase in discretionary income due to a loan repayment leads to a 2 to 3.5 percent increase in non-durable consumption. Additional analysis suggests that these findings may be explained by the presence of borrowing constraints.

Suggested Citation

  • Melvin Stephens Jr., 2003. "The Consumption Response to Predictable Changes in Discretionary Income: Evidence from the Repayment of Vehicle Loans," NBER Working Papers 9976, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:9976
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    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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