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The Consumption Response to Income Changes
Abstract
We review different empirical approaches that researchers have taken to estimate how consumption responds to income changes. We critically evaluate the empirical evidence on the sensitivity of consumption to predicted income changes, distinguishing between the traditional excess sensitivity tests and the effect of predicted income increases and income declines. We also review studies that attempt to estimate the marginal propensity to consume out of income shocks, distinguishing between three different approaches: identifying episodes in which income changes unexpectedly, relying on the covariance restrictions that the theory imposes on the joint behavior of consumption and income growth, and combining realizations and expectations of income or consumption in surveys in which data on subjective expectations are available.
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“In the large literature estimating the Marginal Propensity to Consume (MPC) from small, transitory shocks, most such shocks are around $500 and are typically assumed not to have wealth effects”
From Student Loan Forgiveness (2025) · cites this paper as Jappelli and Pistaferri, 2010
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Metadata
- Authors
- Jappelli, T., & Pistaferri, L.
- Affiliations
- Centre for Studies in Economics and Finance (IT)
- Center for Economic and Policy Research (US)
- Venue
- Annual Review of Economics
- Publisher
- Annual Reviews
- Published
- 2010-09-04
- Volume
- 2
- Issue
- 1
- Pages
- 479-506
- ISSN
- 1941-1383 (ISSN-L)
- 1941-1391
- OpenAlex
- W3126088645
- Cited by
- 704
- References
- 86
- Citations by year
- 2026: 49 · 2025: 51 · 2024: 57 · 2023: 45 · 2022: 46 · 2021: 69 · 2020: 59 · 2019: 46 · 2018: 48 · 2017: 44 · 2016: 39 · 2015: 39 · 2014: 49 · 2013: 29 · 2012: 20
- FWCI
- 9.71
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- Annual Review of Economics (publishedVersion)
- RePEc: Research Papers in Economics (submittedVersion)
- Topics
- Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Monetary Policy and Economic Impact
- Social Sciences › Economics, Econometrics and Finance › Finance › Financial Literacy, Pension, Retirement Analysis
- Social Sciences › Economics, Econometrics and Finance › General Economics, Econometrics and Finance › Economic Theory and Policy
- Keywords
- marginal propensity to consume, income shocks, consumption surveys, income risk
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