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Heterogeneity and aggregate consumption: An empirical assessment

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Abstract

We provide an empirical assessment of a central implication of models with idiosyncratic income risk and incomplete markets: the existence of a role for the distribution of wealth in shaping the dynamics of aggregate consumption. Estimates of consumption Euler equation models extended to include wealth distribution statistics show the latter to have a negligible quantitative impact on aggregate consumption. This contrasts with the important role played by current disposable income, even when we use data for households with (relatively) high liquid wealth. The latter finding suggests the presence of a significant behavioral component behind the high sensitivity of consumption to current income.

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  • Davide Debortoli & Jordi Galí, 2025. "Heterogeneity and aggregate consumption: An empirical assessment," Economics Working Papers 1903, Department of Economics and Business, Universitat Pompeu Fabra.
    • Handle: RePEc:upf:upfgen:1903
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    1. Davide Debortoli & Jordi Galí, 2025. "Heterogeneity and Aggregate Fluctuations: Insights from TANK Models," NBER Macroeconomics Annual, University of Chicago Press, vol. 39(1), pages 307-357.
    2. Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2018. "Monetary Policy According to HANK," American Economic Review, American Economic Association, vol. 108(3), pages 697-743, March.
    3. Davide Debortoli & Jordi Galí, 2024. "Idiosyncratic Income Risk and Aggregate Fluctuations," American Economic Journal: Macroeconomics, American Economic Association, vol. 16(4), pages 279-310, October.
    4. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246, National Bureau of Economic Research, Inc.
    5. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 339-357, April.
    6. repec:fth:harver:1435 is not listed on IDEAS
    7. Emmanuel Farhi & Iván Werning, 2019. "Monetary Policy, Bounded Rationality, and Incomplete Markets," American Economic Review, American Economic Association, vol. 109(11), pages 3887-3928, November.
    8. David Berger & Luigi Bocola & Alessandro Dovis, 2023. "Imperfect Risk Sharing and the Business Cycle," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 138(3), pages 1765-1815.
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    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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