scholarly journals Excess Sensitivity of Consumption to Current Income: Liquidity Constraints or Myopia?

10.3386/w1341 ◽  
1984 ◽  
Author(s):  
Marjorie Flavin
Keyword(s):  
Liquidity Constraints ◽  
Current Income ◽  
Excess Sensitivity

The Precautionary Saving Model

2017 ◽  
Author(s):  
Tullio Jappelli ◽  
Luigi Pistaferri
Keyword(s):  
Liquidity Constraints ◽  
Precautionary Saving ◽  
Income Risk ◽  
Quadratic Utility ◽  
Excess Sensitivity

The chapter removes the assumption of quadratic utility and examines situations in which consumers respond to income risk by increasing current saving to protect against future shocks to income. This motive for saving is called precautionary saving, and it provides an explanation for some of the empirical findings in the literature, such as the observation that people with more volatile incomes tend to save more than individuals with more stable income patterns. Moreover, it can also explain the excess sensitivity of consumption to expected income changes. Indeed, a model with precautionary saving produces a good many predictions similar to those of the model with liquidity constraints.

scholarly journals Household Production and the Excess Sensitivity of Consumption to Current Income

1999 ◽  
Vol 89 (4) ◽  
pp. 902-920 ◽  
Author(s):  
Marianne Baxter ◽  
Urban J Jermann
Keyword(s):  
Empirical Research ◽  
Strong Evidence ◽  
Equilibrium Model ◽  
Household Production ◽  
Permanent Income ◽  
Income Growth ◽  
Work Effort ◽  
Consumption Growth ◽  
Current Income ◽  
Excess Sensitivity

Empirical research on the permanent-income hypothesis (PIH) has found that consumption growth is excessively sensitive to predictable changes in income. This finding is interpreted as strong evidence against the PIH. We propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium model of household production in which permanent-income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors. Although the PIH is true, this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth. (JEL D13, E10, E21).

The Self-Constrained Hand-to-Mouth

2021 ◽  
pp. 1-45
Author(s):  
Michael Gelman
Keyword(s):  
High Frequency ◽  
Liquidity Constraints ◽  
Exponential Model ◽  
Personal Finance ◽  
Buffer Stock ◽  
The Self ◽  
Proximate Cause ◽  
Ultimate Cause ◽  
Stock Model ◽  
Excess Sensitivity

Abstract Many studies have shown that consumption responds to the arrival of predictable income (excess sensitivity). This paper uses a buffer stock model of consumption to understand what causes excess sensitivity and to test which parametrization is consistent with empirical excess sensitivity estimates. Using high frequency granular data from a personal finance app, it finds that while liquidity constraints are a proximate cause, preferences are the ultimate cause of excess sensitivity. Furthermore, it finds that for feasible parameters, a quasi hyperbolic version of the model is more consistent with the level of excess sensitivity relative to a standard exponential model.

EXCESS SENSITIVITY, LIQUIDITY CONSTRAINTS, AND THE COLLATERAL ROLE OF HOUSING

2009 ◽  
Vol 13 (3) ◽  
pp. 305-326 ◽  
Author(s):  
Andrew Benito ◽  
Haroon Mumtaz
Keyword(s):  
Liquidity Constraints ◽  
Capital Gains ◽  
The Other ◽  
Switching Regression ◽  
Home Equity ◽  
Household Level ◽  
Level Data ◽  
Collateral Channel ◽  
Excess Sensitivity

We estimate consumption Euler equations using U.K. household-level data, employing a switching regression technique. We find excess sensitivity to income for one group of households but not for a second group. The likelihood of excess sensitivity is greater for the young, those without liquid assets, the degree-educated, ethnic minorities and those with negative home equity, consistent with liquidity constraints and buffer-stock saving. Housing capital gains affect the consumption plans of the excess sensitivity group of households, but not the other group. These results are consistent with a “collateral channel” for housing. Around 20%–40% of U.K. households display excess sensitivity.

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