Paper #1903

Title:

Heterogeneity and aggregate consumption: An empirical assessment

Authors:

Davide Debortoli and Jordi Galí

Date:

March 2025

Abstract:

We provide an empirical assessment of a central implication of models with idiosyncratic income risk and incomplete markets: the existence of a role for the distribution of wealth in shaping the dynamics of aggregate consumption. Estimates of consumption Euler equation models extended to include wealth distribution statistics show the latter to have a negligible quantitative impact on aggregate consumption. This contrasts with the important role played by current disposable income, even when we use data for households with (relatively) high liquid wealth. The latter finding suggests the presence of a significant behavioral component behind the high sensitivity of consumption to current income.

Keywords:

idiosyncratic income risk, incomplete markets, representative household, HANK models, TANK models

JEL codes:

E21, E32

Area of Research:

Macroeconomics and International Economics

Download the paper in PDF format