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How do households smooth earnings fluctuations: what can we learn from Consumer Expenditure Data?

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  • Fabrizio Perri
  • Dirk Krueger

Abstract

In this paper we demonstrate that different incomplete markets models yield qualitatively distinct predictions about how consumption growth responds to declines and increases in earnings. Markets are either exogenously incomplete in that households can only trade a risk-free bond, subject to a possibly binding borrowing constraint, or endogenously incomplete due to enforcement or informational frictions that prevent perfect risk sharing. We then use earnings and consumption data from the 1980 to 2000 Consumer Expenditure Survey to empirically test these implications about the asymmetric consumption responses to positive and negative earnings growth, in order to assess which form of market incompleteness approximates individual consumption smoothing opportunities best

Suggested Citation

  • Fabrizio Perri & Dirk Krueger, 2004. "How do households smooth earnings fluctuations: what can we learn from Consumer Expenditure Data?," 2004 Meeting Papers 683, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:683
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    More about this item

    Keywords

    Consumption Insurance; Income Shocks; Incomplete Markets;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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