Discussion Paper Details

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Title: The Consumption Response to Income Changes

Author(s): Tullio Jappelli and Luigi Pistaferri

Publication Date: February 2010

Keyword(s): Consumption Smoothing

Programme Area(s): International Macroeconomics

Abstract: We review different empirical approaches that researchers have taken to estimate how consumption responds to income changes. We critically evaluate the empirical evidence on the sensitivity of consumption to predicted income changes, distinguishing between the traditional excess sensitivity tests, and the effect of predicted income increases and income declines. We also review studies that attempt to estimate the marginal propensity to consume out of income shocks, distinguishing between three different approaches: identifying episodes in which income changes unexpectedly, relying on the covariance restrictions that the theory imposes on the joint behavior of consumption and income growth, and combining realizations and expectations of income or consumption in surveys where data on subjective expectations are available.

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Bibliographic Reference

Jappelli, T and Pistaferri, L. 2010. 'The Consumption Response to Income Changes '. London, Centre for Economic Policy Research.