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Media type:
E-Article
Title:
The Self-Constrained Hand-to-Mouth
Contributor:
Gelman, Michael
imprint:
MIT Press, 2022
Published in:The Review of Economics and Statistics
Language:
English
DOI:
10.1162/rest_a_01026
ISSN:
0034-6535;
1530-9142
Origination:
Footnote:
Description:
<jats:title>Abstract</jats:title>
<jats:p>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.</jats:p>