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Does Consumption Respond to Transitory Shocks? Reconciling Natural Experiments and Semistructural Methods

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  • Jeanne Commault

Abstract

Studies based on natural experiments find that consumption responds strongly and significantly to a transitory variation in income, while semistructural estimations find no pass-through of transitory shocks to consumption. I develop a more robust semistructural estimator that relaxes the assumption that log consumption is a random walk. The robust pass-through estimate is significant and large, implying a yearly marginal propensity to consume of 0.32, close to the natural experiment findings. The robust estimator performs well in numerical simulations of a life cycle model, while nonrobust estimators do not. The difference between the two in the simulations is similar to their difference in the survey data.

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  • Jeanne Commault, 2022. "Does Consumption Respond to Transitory Shocks? Reconciling Natural Experiments and Semistructural Methods," American Economic Journal: Macroeconomics, American Economic Association, vol. 14(2), pages 96-122, April.
    • Handle: RePEc:aea:aejmac:v:14:y:2022:i:2:p:96-122
    DOI: 10.1257/mac.20190296
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    1. Sumit Agarwal & Wenlan Qian, 2014. "Consumption and Debt Response to Unanticipated Income Shocks: Evidence from a Natural Experiment in Singapore," American Economic Review, American Economic Association, vol. 104(12), pages 4205-4230, December.
    2. Sumit Agarwal & Chunlin Liu & Nicholas S. Souleles, 2007. "The Reaction of Consumer Spending and Debt to Tax Rebates-Evidence from Consumer Credit Data," Journal of Political Economy, University of Chicago Press, vol. 115(6), pages 986-1019, December.
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    1. Yunho Cho & James Morley & Aarti Singh, 2024. "Did marginal propensities to consume change with the housing boom and bust?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(1), pages 174-199, January.
    2. Stéphane Dupraz, 2023. "The Dynamic IS Curve when there is both Investment and Savings," Working papers 905, Banque de France.
    3. Richard Blundell & Margherita Borella & Jeanne Commault & Mariacristina De Nardi, 2024. "Old Age Risks, Consumption, and Insurance," American Economic Review, American Economic Association, vol. 114(2), pages 575-613, February.
    4. Ghosh, Anisha & Theloudis, Alexandros, 2023. "Consumption Partial Insurance in the Presence of Tail Income Risk," Other publications TiSEM c8da0a17-57cb-40bf-ab61-6, Tilburg University, School of Economics and Management.
    5. Gizem Koşar & Davide Melcangi & Laura Pilossoph & David Wiczer, 2023. "Stimulus through Insurance: The Marginal Propensity to Repay Debt," Staff Reports 1065, Federal Reserve Bank of New York.
    6. Roberto Tamborini, 2023. "Inflation surprises in a New Keynesian economy with a true consumption function. The Eurozone as an inflation target zone," DEM Working Papers 2023/1, Department of Economics and Management.

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    More about this item

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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