Arellano, Manuel, Blundell, Richard, Bonhomme, Stéphane and Light, Jack (2024) Heterogeneity of consumption responses to income shocks in the presence of nonlinear persistence. Journal of Econometrics, vol. 240 (n° 2).

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Identification Number : 10.1016/j.jeconom.2023.04.001


In this paper we use the enhanced consumption data in the Panel Survey of Income Dynamics (PSID) from 2005–2017 to explore the transmission of income shocks to consumption. We build on the nonlinear quantile framework introduced in Arellano et al. (2017). Our focus is on the estimation of consumption responses to persistent nonlinear income shocks in the presence of unobserved heterogeneity. To reliably estimate heterogeneous responses in our unbalanced panel, we develop Sequential Monte Carlo computational methods. We find substantial heterogeneity in consumption responses, and uncover latent types of households with different life-cycle consumption behavior. Ordering types according to their average log-consumption, we find that low-consumption types respond more strongly to income shocks at the beginning of the life cycle and when their assets are low, as standard life-cycle theory would predict. In contrast, high-consumption types respond less on average, and in a way that changes little with age or assets. We examine various mechanisms that might explain this heterogeneity.

Item Type: Article
Language: English
Date: 2024
Refereed: Yes
Uncontrolled Keywords: Nonlinear income persistence, Consumption dynamics, Partial insurance, Heterogeneity, Panel data
JEL Classification: C23 - Models with Panel Data
D31 - Personal Income, Wealth, and Their Distributions
D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
Divisions: TSE-R (Toulouse)
Site: UT1
Date Deposited: 09 Apr 2024 09:10
Last Modified: 09 Apr 2024 09:10
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