Household Consumption Does Not Respond Directly to Interest Rates: Evidence From 10 Macroeconomic Shocks

Figure 1: Intertemporal MPC in model and data
Notes: Figure depicts the population-mean consumption response to a one-time lump-sum transfer received at date \(0\), as a share of the transfer amount. Blue round dots and solid lines show the estimates from Fagereng et al., 2021, and orange squares and dashed lines show the estimates in the calibrated model.

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Figure 2: Columns of the consumption-to-income Jacobian, with and without sticky expectations
Notes: The figure shows the consumption response at different horizons (x-axis, in quarters) to aggregate labor income shocks arriving at different dates, expressed as a fraction of the income shock. The solid line shows the response to a shock arriving at date 0. The dashed lines show the response to a shock arriving in six quarters’ time: the plain dashed line assumes full information rational expectations (FIRE), while the dashed line with crosses assumes sticky expectations with \(\theta^Y = 0.85\) (15% of households update their expectations each quarter).

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Figure 3: Columns of the consumption-to-interest-rate Jacobian, divided into the substitution and income effect, with and without sticky expectations
Notes: The figure shows the consumption response at different horizons to real interest rate shocks, decomposed into substitution effects (left panel) and income effects (right panel). Solid lines show the response to a shock arriving at date 0. Dashed lines show the response to a shock arriving in six quarters: the plain dashed line assumes FIRE, while the dashed line with crosses assumes sticky expectations with \(\theta^R\) governing the fraction of households that do not update beliefs about future interest rates each period.

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Figure 4: Romer and Romer, 2004 shock impulse responses
Notes: Shaded regions show 90 percent confidence intervals.
Source: Authors’ calculations using data compiled from Federal Reserve Economic Data (FRED), Federal Reserve Bank of St. Louis; replication files for Ramey, 2016; and the Survey of Professional Forecasters, Federal Reserve Bank of Philadelphia.

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Figure 5: Marginal posterior distributions for sticky expectations parameters: Romer and Romer, 2004 shocks
(a) Interest rate
(b) Aggregate labor income
Notes: Blue solid lines depict the log marginal posterior density over the support of the estimated parameter. Red vertical solid lines indicate the posterior mode, and grey shaded areas indicate the 95 percent highest posterior density regions.

(a) Interest rate

(b) Aggregate labor income

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Figure 6: Comparison of the consumption path to Romer and Romer, 2004 shock across model assumptions
Notes: Blue solid line shows the empirical impulse response (shaded region shows 90 percent confidence intervals). Red dashed line shows the model with MAP estimates of both \(\theta^Y\) and \(\theta^R\) (sticky expectations for both labor income and interest rates). Yellow dashed line shows the model with sticky interest-rate expectations only (\(\theta^R\) at MAP, \(\theta^Y = 0\)). Green dot-dash line shows the model with sticky labor-income expectations only (\(\theta^Y\) at MAP, \(\theta^R = 0\)). Purple dotted line shows the full-information rational expectations (FIRE) model (\(\theta^Y = \theta^R = 0\)).

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Figure 7: Comparison of the consumption path to Ben Zeev and Pappa, 2017 shock across model assumptions
Notes: Blue solid line shows the empirical impulse response (shaded region shows 90 percent confidence intervals). Red dashed line shows the model with MAP estimates of both \(\theta^Y\) and \(\theta^R\) (sticky expectations for both labor income and interest rates). Yellow dashed line shows the model with sticky interest-rate expectations only (\(\theta^R\) at MAP, \(\theta^Y = 0\)). Green dot-dash line shows the model with sticky labor-income expectations only (\(\theta^Y\) at MAP, \(\theta^R = 0\)). Purple dotted line shows the full-information rational expectations (FIRE) model (\(\theta^Y = \theta^R = 0\)).

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Figure 8: Posterior distribution for sticky expectations parameters: all shocks
(a) Interest rate
(b) Aggregate labor income
Notes: Blue solid lines depict the log marginal posterior density over the support of the estimated parameter. Red vertical solid lines indicate the posterior mode, and grey shaded areas indicate the 95 percent highest posterior density regions.

(a) Interest rate

(b) Aggregate labor income

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Figure 9: Eighth column of the interest rate Jacobian in four structural models
Notes: The figure plots column 8 of the interest rate Jacobian (\(\mathcal{J}^{C,R}_{h,8}\)) for four structural models: the baseline full-information rational expectations (FIRE) model, the sticky expectations model with \(\theta^R = 0.8\), a finite horizon planning model, and a myopia model. Each curve shows the consumption response at horizon \(h\) to an interest rate change at horizon \(s = 8\). The black dotted lines show the corresponding basis function approximations using the tensor-product B-spline parameterization. All models exhibit smooth behavior within the causal (\(h \geq s\)) and anticipatory (\(h < s\)) regions, with a structural break at the diagonal—the minimal regularity encoded in the basis.

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Figure 10: Estimated interest rate Jacobians
(a) FIRE model
(b) Non-parametrically estimated model
Notes: The figure plots the interest rate Jacobian \(\mathcal{J}^{C,R}_{h,s}\), showing the consumption response at horizon \(h\) to an interest rate change at horizon \(s\). Panel (a) shows the FIRE model, which serves as the prior mean. Panel (b) shows the posterior mean Jacobian estimated using all ten shocks jointly.

(a) FIRE model

(b) Non-parametrically estimated model

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Figure 11: Non-parametric estimate of the consumption response to a real interest rate shock
Notes: The figure plots the prior and posterior distributions of the consumption response to an exponentially decaying real interest rate shock (1 percentage point on impact, 4-quarter half-life), computed from the non-parametric interest rate Jacobian estimated using all ten shocks. The Jacobian is parameterized using a tensor-product B-spline basis with separate expansions for the lower-triangular (causal) and upper-triangular (anticipatory) regions. The orange shaded region is the 95% prior credible interval, centered on the structural model’s prediction. The blue shaded region is the 95% posterior credible interval, with the posterior mean shown in the solid blue line. The green dotted line shows the structural model’s prediction under full-information rational expectations (\(\theta^R = 0\)).

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Figure 12: Impulse responses to Romer and Romer (2004) shock

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Figure 13:
(a) Interest rate
(b) Aggregate labor income

(a) Interest rate