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The Self-Constrained Hand-to-Mouth

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  • Michael Gelman

Abstract

Many studies have shown that consumption responds to the arrival of predictable income (excess sensitivity). This paper uses a buffer stock model of consumption to understand what causes excess sensitivity and to test which parameterization is consistent with empirical excess sensitivity estimates. Using high-frequency granular data from a personal finance app, I find that while liquidity constraints are a proximate cause, preferences are the ultimate cause of excess sensitivity. Furthermore, it finds that for feasible parameters, a quasi-hyperbolic version of the model is more consistent with the level of excess sensitivity relative to a standard exponential model.

Suggested Citation

  • Michael Gelman, 2022. "The Self-Constrained Hand-to-Mouth," The Review of Economics and Statistics, MIT Press, vol. 104(5), pages 1096-1109, December.
    • Handle: RePEc:tpr:restat:v:104:y:2022:i:5:p:1096-1109
    DOI: 10.1162/rest_a_01026
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    Cited by:

    1. Beqiraj, Elton & Tancioni, Massimiliano, 2023. "Subsidizing new jobs in the Euro-zone periphery," International Review of Economics & Finance, Elsevier, vol. 86(C), pages 380-401.
    2. Vihriälä, Erkki, 2023. "Self-imposed liquidity constraints via voluntary debt repayment," Journal of Financial Economics, Elsevier, vol. 150(2).

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