Consumption and Liquidity Shocks

Abstract

AbstractWe study the response of consumption to anticipated and unanticipated liquidity gains using information on gifts (occasional and recurrent) and severance pay from the Italian Household Income and Wealth survey. Consistent with standard intertemporal consumption models, we find that unanticipated income shocks affect nondurable consumption while anticipated shocks have no effect. In the former case, the marginal propensity to consume is estimated to be around 7%. We find also that this consumption response is stronger for poor households (around 10%) and negligible for rich ones.