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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 Anticipated Changes in Income

The Response of Consumption to Anticipated Changes in Income

(p.131) Chapter 8 The Response of Consumption to Anticipated Changes in Income
The Economics of Consumption

Tullio Jappelli

Luigi Pistaferri

Oxford University Press

The intertemporal models studied so far postulate that people use savings in order to smooth income fluctuations, and that unless there are liquidity constraints, consumption responds little if at all to changes in income that were expected. When this major theoretical prediction is violated, researchers conclude that consumption is excessively sensitive to anticipated income changes. In this chapter we review some of the empirical approaches researchers have taken to estimate the response of consumption to anticipated income changes. We point out that empirically it is very hard to identify situations in which income changes in a predictable way. But even if the empirical difficulties can be surmounted, there are many plausible explanations for the rejection of the implications of the theoretical models, including liquidity constraints, non-separability between consumption and leisure, home production, the persistence of habits, aggregation bias, and the durability of goods.

Keywords:   anticipated income changes, excess sensitivity, non-separability between consumption and leisure, home production, habit formation, durability of goods, aggregation bias

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