Heterogeneity and Aggregate Consumption: An Empirical Assessment

• Authors: Jordi Galí and Davide Debortoli.
• BSE Working Paper: 1484 | April 25
• Keywords: incomplete markets , idiosyncratic income risk , HANK models , representative household , TANK models
• JEL codes: E21, E32
• incomplete markets
• idiosyncratic income risk
• HANK models
• representative household
• TANK models

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.