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

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  • Jeanne Commault

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

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.

Suggested Citation

  • Jeanne Commault, 2022. "Does Consumption Respond to Transitory Shocks? Reconciling Natural Experiments and Semistructural Methods," Sciences Po Economics Publications (main) hal-03947994, HAL.
    • Handle: RePEc:hal:spmain:hal-03947994
    DOI: 10.1257/mac.20190296
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    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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