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Heterogeneity of Consumption Responses to Income Shocks in the Presence of Nonlinear Persistence

Arellano, Manuel; Blundell, Richard; Bonhomme, Stéphane; Light, Jack; (2023) Heterogeneity of Consumption Responses to Income Shocks in the Presence of Nonlinear Persistence. Journal of Econometrics , Article 105449. 10.1016/j.jeconom.2023.04.001. (In press). Green open access

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Abstract

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.

Type: Article
Title: Heterogeneity of Consumption Responses to Income Shocks in the Presence of Nonlinear Persistence
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/j.jeconom.2023.04.001
Publisher version: https://doi.org/10.1016/j.jeconom.2023.04.001
Language: English
Additional information: Copyright © 2023 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY license (http://creativecommons.org/licenses/by/4.0/).
Keywords: Nonlinear income persistence; Consumption dynamics; Partial insurance; Heterogeneity; Panel data
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/10168778
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