Events at CERGE-EI

Prof. Davide Debortoli

Universitat Pompeu Fabra, Spain

Authors: Davide Debortoli and Jordi Galí

Abstract: We provide an empirical assessment of a central prediction of recent heterogenous agent models with idiosyncratic income risk and incomplete markets: the existence of a role for the wealth and income distributions in shaping the dynamics of aggregate consumption. We extend the empirical consumption Euler equation framework of Campbell-Mankiw (1989) to include summary statistics of the wealth and income distributions, and show that those variables have a negligible quantitative impact on aggregate consumption. This contrasts with the important role uncovered for current disposable income, which points to hand-to-mouth behavior as a key driver of aggregate consumption dynamics.

JEL classification: E21, E32
Keywords: idiosyncratic income risk, incomplete markets, hand-to-mouth consumers, HANK models, TANK model

Full Text: Heterogeneity and Aggregate Consumption: An Empirical Assessment