The Response of Expenditures to Anticipated Income Changes: Panel Data Estimates
Standard models of intertemporal allocation predict that the time path of expenditures should beindependent of the time path of income. Recently two papers, Parker (1999) and Souleles (1999)have suggested that U.S. households have a high marginal propensity to spend within yearanticipated income changes. We use an expenditure survey panel from Spain to re-examine thisissue. We exploit two important features of the Spanish data. First, we have quarterly panel datathat follows households for more than four quarters. Second, we use the fact that workers areexogenously sorted into one of two payment schemes: some receive the same amount eachmonth of the year and others receive an extra payment in June and December. The extra paymentis large and predictable. We examine the detailed pattern of expenditures over the year to seewhether they differ between the two groups. We fail to find even weak differences. Wecomplement this with a conventional Euler equation analysis of excess sensitivity. Our predictingequation for (quarterly) earnings growth is much better than usual and is likely to give a powerfultest of the hypothesis that predictable changes in income do not lead to changes in expenditurepatterns. The results of this analysis confirm the graphical analysis: we find no evidence ofexcess sensitivity. We conclude that households in normal times do smooth consumption overthe year. We suggest a reconciliation of our results with those of Parker and Souleles.
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Volume (Year): 91 (2001)
Issue (Month): 3 (June)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Parker, J.A., 1997. "The Reaction of Household Consumption to Predictable Changes in Payroll Tax Rates," Working papers 9724, Wisconsin Madison - Social Systems.
- Martin Browning & Annamaria Lusardi, 1996.
"Household Saving: Micro Theories and Micro Facts,"
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- Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
- Martin Browning & Annamaria Lusardi, 1995. "Household Saving: Micro Theories and Micro Facts," Department of Economics Working Papers 1995-02, McMaster University.
- Poterba, James M, 1988. "Are Consumers Forward Looking? Evidence from Fiscal Experiments," American Economic Review, American Economic Association, vol. 78(2), pages 413-18, May.
- Shapiro, Matthew D & Slemrod, Joel, 1995.
"Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding,"
American Economic Review,
American Economic Association, vol. 85(1), pages 274-83, March.
- Matthew D. Shapiro & Joel Slemrod, 1993. "Consumer Response to the Timing of Income: Evidence from a Change in Tax Withholding," NBER Working Papers 4344, National Bureau of Economic Research, Inc.
- Horioka, Charles Yuji, 1990. "Why is Japan's household saving rate so high? A literature survey," Journal of the Japanese and International Economies, Elsevier, vol. 4(1), pages 49-92, March.
- Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September.
- Wilcox, David W, 1989.
"Social Security Benefits, Consumption Expenditure, and the Life Cycle Hypothesis,"
Journal of Political Economy,
University of Chicago Press, vol. 97(2), pages 288-304, April.
- David W. Wilcox, 1987. "Social security benefits, consumption expenditure, and the life cycle hypothesis," Working Paper Series / Economic Activity Section 78, Board of Governors of the Federal Reserve System (U.S.).
- John H. Cochrane, 1988.
"The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives,"
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2730, National Bureau of Economic Research, Inc.
- Cochrane, John H, 1989. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," American Economic Review, American Economic Association, vol. 79(3), pages 319-37, June.
- Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
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