Saving-Constrained Households

Abstract

We develop a theory of saving-constrained households to explain the following facts that are difficult to reconcile with existing theories: 1) Consumption is excessively volatile relative to income (established fact), 2) a large fraction of high-debt households exhibit marginal propensities to consume near zero, 3) lagged high expenditure is associated with low contemporaneous spending propensities. Our proposed interpretation of these facts is that household expenditure depends on time-varying minimum consumption thresholds that, if violated, yield substantial utility costs. We demonstrate that such a model can match many features of the joint dynamics of income and consumption. Our theory has implications for the propagation of macroeconomic shocks.

Consumer Spending During Unemployment: Positive and Normative Implications

“…We fill this gap using the SvW generalization of the Baily-Chetty formula and find that duration extensions have consumption-smoothing gains that are four times larger than level increases. Implementing equation (10) indicates that welfare is 0.082 percent higher under a one-month benefit duration extension, which is four times larger than the gains from level increases discussed in the previous paragraph. This Table 4-Welfare Impact of Changes in UI Generosity Welfare change as an equivalent increase in lifetime income ΔWelfare: UI benefit increase ΔWelfare: UI duration extension result is not driven by our choice of the risk aversion parameter.…”

“…Mean spending on nondurables in JPMCI is 139 percent of the CE Survey benchmark and 66 percent of the PCE benchmark. 10 For comparable durables, JPMCI is 31 percent of CE Survey and 24 percent of PCE.…”

“…receive this benefit extension) cexhaust using our estimate for average consumption in the first month of exhaustion in Figure 2. Equation 2in SvW shows that the welfare gain from this potential benefit duration extension can be approximated as (10) dW…”

“…The intuition for equation (10) is similar to equation (9), except that the transfer of benefits ( b • dP ) is going to the first month after exhaustion and so is valued according to the average marginal utility of consumption for that group. To implement the formulas above quantitatively, we consider benefit increases and extensions of equivalent cost.…”

“…See online Appendix C for an explanation of the "miscellaneous nondurables" category, which accounts for 5 percent of checking outflows 9. In a robustness check in online Appendix E.1, we construct a measure of nondurable spending which assumes that all uncategorized spending (including cash) is spent on nondurables in proportion to that payment method's nondurable expenditure share in the DCPC 10. It is well known that the CE Survey understates consumption expenditures Passero, Garner, and McCully (2014).…”