American Economic Journal: Macroeconomics April 2022: https://www.aeaweb.org/articles?id=10.1257/mac.20190296
Abstract: Studies based on natural experiments find that consumption responds strongly and significantly to a transitory variation in income, while semistructural estimations find no pass-through of transitory shocks to consumption. I develop a more robust semistructural estimator that relaxes the assumption that log consumption is a random walk. The robust pass-through estimate is significant and large, implying a yearly marginal propensity to consume of 0.32, close to the natural experiment findings. The robust estimator performs well in numerical simulations of a life cycle model, while nonrobust estimators do not. The difference between the two in the simulations is similar to their difference in the survey data.
with Richard Blundell, Margherita Borella & Mariacristina De Nardi
R&R at the American Economic Review
Abstract: In old age, consumption can fluctuate because of shocks to available resources and because health shocks affect utility from consumption. We find that even temporary drops in income and health are associated with drops in consumption and most of the effect of temporary drops in health on consumption stems from the reduction in the marginal utility from consumption that they generate. More precisely, after a health shock, richer households adjust their consumption of luxury goods because their utility of consuming them changes. Poorer households, instead, adjust both their necessary and luxury consumption because of changing resources and utility from consumption.
Abstract: I show theoretically and empirically that, everything else being equal, people with higher persistent earnings respond more to transitory shocks. Theoretically, people with the same wealth and transitory earnings but higher persistent earnings than others consume more and finance a larger share of their consumption out of their uncertain expected future earnings. Their precautionary motive is thus stronger and their consumption more responsive to transitory shocks. Empirically, in US survey data, an increase in persistent earnings by one standard deviation raises people’s consumption response to transitory shocks by 6%-8%. Numerical simulations of a life-cycle model can reproduce these empirical results.