The Self-Constrained Hand-to-Mouth
The Review of Economics and Statistics
2022
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 parameterization is consistent with empirical excess sensitivity estimates. Using high-frequency granular data from a personal finance app, I find 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.
- DOI
- 10.1162/rest_a_01026
- Volume
- 104 (5)
- Pages
- 1096-1109
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref