Consumption decisions are crucial determinants of business cycles and growth. Knowledge of how consumers respond to the economic environment and how they react to the risks that they encounter during the life-cycle is therefore important for evaluating stabilization policies and the effectiveness of fiscal packages implemented in response to economic downturns or financial crises.
In The Economics of Consumption, Tullio Jappelli and Luigi Pistaferri provide a comprehensive examination of the most important developments in the field of consumption decisions and evaluate economic models against empirical evidence. The first part of the book provides the basic ingredients of economic models of consumption decisions. The central part reviews the empirical literature on the effect of income and wealth changes on consumption and on the relevance of precautionary saving and credit market imperfections. The last chapters extend the basic framework to such important areas as bequests, leisure, lifetime uncertainty, and financial sophistication.
Jappelli and Pistaferri shed light on important issues, including how consumption responds to changes in economic resources, how economic circumstances and consumers' characteristics influence behavior, and whether consumption inequality depends on income shocks and their persistence.
Author(s): Tullio Jappelli, Luigi Pistaferri
Publisher: Oxford University Press
Year: 2017
Language: English
Commentary: downloaded from Memory of the World Library
Pages: 294
Cover
The Economics of Consumption
Copyright
Dedication
Contents
Preface
Acknowledgments
1. Intertemporal choice under certainty
1.1. The two-period model
1.2. The multi-period model
1.3. The life-cycle model
1.4 Demographic variables
1.5. Intertemporal choice in continuous time
1.6. Infinite time horizon
1.7. Aggregate implications of the life-cycle model
2. The age profile of consumption and wealth
2.1. Consumption growth and the interest rate
2.2. Saving and the interest rate
2.3. The age profiles of income, consumption, and wealth
2.4. Estimating the age profile of consumption
2.5. Demographic variables and equivalence scales
2.6. The age profile of wealth
2.7. The measurement of savings and wealth
3. Complete markets
3.1. A model with two states and two periods
3.2. The multi-period model
3.3. Tests of complete markets
3.4. Implications for consumption inequality and mobility
3.5. The aggregation problem
3.6. Why don’t we observe complete markets?
4. The certainty equivalence model
4.1. Intertemporal choice under uncertainty
4.2. The Euler equation with quadratic utility
4.3. The consumption function and income innovations
4.4. Income shocks and the marginal propensity to consume
4.5. Saving for a rainy day
4.6. Consumption inequality
5. Liquidity constraints
5.1. A two-period model
5.2. The sensitivity of consumption to expected income changes
5.3. The timing of income and consumption
5.4. The natural borrowing constraint
5.5. The Euler equation with liquidity constraints
6. The precautionary saving model
6.1. Incomplete markets and precautionary saving
6.2. A numerical example
6.3. The Euler equation with precautionary saving
6.4. An explicit solution for precautionary saving
6.5. The marginal propensity to consume with precautionary saving
Appendix: Risk aversion and prudence
7. The buffer stock model
7.1. Expected liquidity constraints
7.2. Precautionary saving with liquidity constraints
7.3. The buffer stock model
7.4. The concavity of the consumption function
Appendix: Solving consumption stochastic dynamic programming problems
8. The response of consumption to anticipated changes in income
8.1. The excess sensitivity test
8.2. Implementing and interpreting the excess sensitivity test
8.3. Tests for liquidity constraints
8.4. Direct evidence from credit markets
8.5. Asymmetric response to income increases and declines
8.6. Episodes of anticipated income increases
8.7. Anticipated income declines and the retirement consumption puzzle
Appendix: Econometric problems in estimating the Euler equation
Measurement error
Short panels
9. The response of consumption to unanticipated changes in income
9.1. The quasi-experimental approach
9.2. Covariance restrictions
9.3. Consumption mobility
9.4. Consumption inequality
9.5. Subjective expectations
9.6. Shocks to lifetime resources
9.7. The wealth effect
10. The response of consumption to income risk
10.1. Measuring income risk
10.2. Euler equation estimates
10.3. Evidence from wealth regressions
10.4. Estimation by simulation methods
10.5. Group comparisons
10.6. Beyond income risk
10.7. Endogenous incomplete markets
11. Lifetime uncertainty
11.1. A two-period model
11.2. Annuity contracts
11.3. The multi-period model
11.4. Complete markets
11.5. The annuity puzzle
11.6. The age-wealth profile with lifetime uncertainty
12. Bequest motives
12.1. Altruism
12.2. Strategic bequests
12.3. Inter vivos transfers
12.4. Joy of giving and the age-wealth profile
12.5. The size of intergenerational transfers
12.6. Transfer taxes
13. Time, habits, and consumer durables
13.1. Non-separable utility functions
13.2. Habits
13.3. Durable goods
13.4. Leisure
13.5. Home production
13.6. Unitary versus collective models
14. Non-standard preferences
14.1. Mental accounting
14.2. Time inconsistency
14.3. Financial sophistication
14.4. Social preferences
Conclusions
References
Index
