Does Consumption Respond to Transitory Shocks?
- American Economic Journal: Macroeconomics (Forthcoming)
Studies based on natural experiments find that consumption
responds strongly and significantly to a transitory variation in
income, while semi-structural estimations find no pass-through
of transitory shocks to consumption. I develop a more robust
semi-structural estimator that relaxes the assumption that log-consumption is a random walk. The robust pass-through estimate
is significant and large, implying a yearly MPC of 0.32, close to the
natural experiment findings. The robust estimator performs well
in numerical simulations of a life-cycle model while non-robust estimators do not. The difference between the two in the simulations
is similar to their difference in the survey data.
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