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

Author

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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," SciencePo Working papers Main hal-03947994, HAL.
    • Handle: RePEc:hal:spmain:hal-03947994
    DOI: 10.1257/mac.20190296
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    References listed on IDEAS

    as
    1. Sumit Agarwal & Chunlin Liu & Nicholas S. Souleles, 2007. "The Reaction of Consumer Spending and Debt to Tax Rebates-Evidence from Consumer Credit Data," Journal of Political Economy, University of Chicago Press, vol. 115(6), pages 986-1019, December.
    2. Sumit Agarwal & Wenlan Qian, 2014. "Consumption and Debt Response to Unanticipated Income Shocks: Evidence from a Natural Experiment in Singapore," American Economic Review, American Economic Association, vol. 104(12), pages 4205-4230, December.
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    Cited by:

    1. Yunho Cho & James Morley & Aarti Singh, 2024. "Did marginal propensities to consume change with the housing boom and bust?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 39(1), pages 174-199, January.
    2. Crawley, Edmund & Theloudis, Alexandros, 2024. "Income Shocks and their Transmission into Consumption," Discussion Paper 2024-012, Tilburg University, Center for Economic Research.
    3. Giovanni L. Violante & Greg Kaplan, 2022. "The Marginal Propensity to Consume in Heterogeneous Agent Models," Annual Review of Economics, Annual Reviews, vol. 14(1), pages 747-775, August.
    4. Richard Blundell & Margherita Borella & Jeanne Commault & Mariacristina De Nardi, 2024. "Old Age Risks, Consumption, and Insurance," American Economic Review, American Economic Association, vol. 114(2), pages 575-613, February.
    5. Ghosh, Anisha & Theloudis, Alexandros, 2023. "Consumption Partial Insurance in the Presence of Tail Income Risk," Other publications TiSEM c8da0a17-57cb-40bf-ab61-6, Tilburg University, School of Economics and Management.
    6. Roberto Tamborini, 2024. "Inflation surprises in a New Keynesian economy with a “true” consumption function," Economic Inquiry, Western Economic Association International, vol. 62(3), pages 1192-1215, July.
    7. Christopher Busch & Alexander Ludwig, 2024. "Higher‐Order Income Risk Over The Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 65(3), pages 1105-1131, August.
    8. Dirk Krueger & Egor Malkov & Fabrizio Perri, 2023. "How Do Households Respond to Income Shocks?," Staff Report 655, Federal Reserve Bank of Minneapolis.
    9. Stéphane Dupraz, 2023. "The Dynamic IS Curve when there is both Investment and Savings," Working papers 905, Banque de France.
    10. Gizem Koşar & Davide Melcangi & Laura Pilossoph & David Wiczer, 2023. "Stimulus through Insurance: The Marginal Propensity to Repay Debt," Staff Reports 1065, Federal Reserve Bank of New York.
    11. Roberto Tamborini, 2023. "Inflation surprises in a New Keynesian economy with a true consumption function. The Eurozone as an inflation target zone," DEM Working Papers 2023/1, Department of Economics and Management.

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    More about this item

    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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