Does Consumption Respond to Transitory Shocks? Reconciling Natural Experiments and Semistructural Methods
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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.Citation
Commault, Jeanne. 2022. "Does Consumption Respond to Transitory Shocks? Reconciling Natural Experiments and Semistructural Methods." American Economic Journal: Macroeconomics, 14 (2): 96-122. DOI: 10.1257/mac.20190296Additional Materials
JEL Classification
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- E21 Macroeconomics: Consumption; Saving; Wealth
- J11 Demographic Trends, Macroeconomic Effects, and Forecasts
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