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The Consumption Response to Income Changes

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  • Tullio Jappeli

    (University of Naples Federico II)

  • Luigi Pistaferri

    ()
    (Department of Economics, Stanford University)

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.

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Bibliographic Info

Paper provided by Stanford Institute for Economic Policy Research in its series Discussion Papers with number 08-052.

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Date of creation: Aug 2009
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Handle: RePEc:sip:dpaper:08-052

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Keywords: Consumption smoothing; marginal propensity to consume.;

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