Working Paper

A Model of Expenditure Shocks


Abstract: We document four features of consumption and income microdata: (1) household-level consumption is as volatile as household income on average, (2) household-level consumption has a positive but small correlation with income, (3) many low-wealth households have marginal propensities to consume near zero, and (4) lagged high expenditure is associated with low contemporaneous spending propensities. Our interpretation is that household expenditure depends on time-varying consumption thresholds where marginal utility discontinuously increases. Our model with consumption thresholds matches the four facts better than does a standard model. Poor households in our model also exhibit “excess sensitivity” to anticipated income declines.

Keywords: E21; D14;

https://doi.org/10.26509/frbc-wp-202004

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File(s): https://doi.org/10.26509/frbc-wp-202004
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Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2020-02-04

Number: 20200400

Pages: 47

Note: This paper was previously circulated under the title “Saving-Constrained Households.”