January 2020

Consumption Heterogeneity: Micro Drivers and Macro Implications

Edmund Crawley and Andreas Kuchler

Abstract:

This paper explores the microfoundations of consumption models and quantifies the macro implications of consumption heterogeneity. We propose a new empirical method to estimate the response of consumption to permanent and transitory income shocks for different groups of households. We then apply this method to administrative data from Denmark. The large sample size, along with detailed household balance sheet information, allows us to finely divide the population along relevant dimensions. We find that households that stand to lose from an interest rate hike are significantly more responsive to income shocks than those that stand to gain. Following a 1-percentage-point interest rate increase, we estimate that consumption growth decreases by a 1/4 percentage point through this interest rate exposure channel alone, making this channel substantially larger than the intertemporal substitution channel that is at the core of representative agent New Keynesian models.

DOI: https://doi.org/10.17016/FEDS.2020.005

PDF: Full Paper

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Last Update: January 16, 2020