Estimating Consumption Responses to Income Shocks of Different Persistence Using Self‐Reported Income Measures |
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| Authors: | Merike Kukk Dmitry Kulikov Karsten Staehr |
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| Affiliation: | 1. Tallinn University of Technology, Estonia;2. Eesti Pank, Estonia;3. Tallinn University of Technology and Eesti Pank, Estonia |
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| Abstract: | Models of intertemporal consumption choice posit that consumption reacts more strongly to income shocks with persistent effects than to shocks with temporary effects. This prediction is tested using data from the Estonian Household Budget Surveys for 2002–07. Questions in the survey make it possible to distinguish between two income components of different persistence, using the individual households’ subjective income classification. Estimations confirm that households distinguish income components of different persistence and react to these differently; the consumption response to income shocks with persistent effects is significantly higher than the response to shocks with only temporary effects. Further analysis reveals, however, that consumption also reacts to lagged shocks to temporary income even when the households are not liquidity constrained, suggesting that their behavior is not fully consistent with the standard forward‐looking unconstrained consumption models. |
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| Keywords: | D12 D91 E21 R22 consumption smoothing excess smoothness income persistence income shock intertemporal consumption allocation self‐insurance |
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