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The Economics of ConsumptionTheory and Evidence$
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Tullio Jappelli and Luigi Pistaferri

Print publication date: 2017

Print ISBN-13: 9780199383146

Published to Oxford Scholarship Online: October 2017

DOI: 10.1093/acprof:oso/9780199383146.001.0001

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The Response of Consumption to Unanticipated Changes in Income

The Response of Consumption to Unanticipated Changes in Income

(p.157) Chapter 9 The Response of Consumption to Unanticipated Changes in Income
The Economics of Consumption

Tullio Jappelli

Luigi Pistaferri

Oxford University Press

In this chapter we examine tests of the hypothesis that consumption will respond to unanticipated income changes and that the response will depend on the persistence of the shock and on the degree of imperfection in the credit and insurance markets. The literature has considered three approaches to estimating the effect of income shocks on consumption, that is, the marginal propensity to consume. One identifies episodes in which income changes unexpectedly and seeks to evaluate, in a quasi-experimental setting, how consumption reacts. A second estimates the marginal propensity to consume with respect to income shocks using the covariance restrictions imposed by theory on the joint behavior of consumption and income growth. The third estimates the impact of shocks by combining realizations and expectations of income or consumption in surveys where data on subjective expectations are available.

Keywords:   unanticipated income changes, transitory income shocks, permanent income shocks, marginal propensity to consume, quasi-experimental approach, covariance restrictions, subjective expectations

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