Presentation | October 15 | 12-1 p.m. | 597 Evans Hall
Abstract: We propose a model of household consumption that explicitly accounts for unexpected expenditure shocks such as automobile repairs. We highlight the relevance of unanticipated expenditure by documenting a number of striking features of the micro data: 1) household-level consumption is as volatile as household income on average, 2) household-level consumption is relatively uncorrelated with income, 3) a large fraction of low-wealth households exhibit marginal propensities to consume near zero, and 4) lagged high expenditure is associated with low contemporaneous spending propensities. Our proposed interpretation of these facts is that household expenditure depends on time-varying minimum consumption thresholds that, if violated, yield substantial utility costs. We embed minimum consumption thresholds in an incomplete market heterogeneous-agent model and demonstrate that the minimum consumption thresholds are binding for many households. These households are saving-constrained, and they use additional income to save rather than spend.
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