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The Consumption Response to Income Changes

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Tullio Jappelli & Luigi Pistaferri, 2010. "The Consumption Response to Income Changes," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 479-506, September.
  • Handle: RePEc:anr:reveco:v:2:y:2010:p:479-506
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev.economics.050708.142933
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    Keywords

    consumption smoothing; marginal propensity to consume;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • J65 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment Insurance; Severance Pay; Plant Closings

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