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The Consumption Response to Income Changes

  • Tullio Jappelli
  • Luigi Pistaferri


    (Department of Economics, University of Naples Federico II, 80126 Naples, Italy, CSEF, and CEPR
    Department of Economics, Stanford University, Stanford, California 94305, NBER, CEPR, and SIEPR)

We review different empirical approaches that researchers have taken 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 in which data on subjective expectations are available.

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Article provided by Annual Reviews in its journal Annual Review of Economics.

Volume (Year): 2 (2010)
Issue (Month): 1 (09)
Pages: 479-506

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Handle: RePEc:anr:reveco:v:2:y:2010:p:479-506
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