Understanding Consumption Smoothing: Evidence from the U.S. Consumer Expenditure Data

Abstract

Consumption models with endogenous debt constraints differ from standard incomplete markets models in their predictions about an individual household’s ability to smooth consumption across time and states of the world. In this paper we develop these differences, both theoretically and quantitatively. We then use data from the US Consumer Expenditure Survey (CE) to assess along which dimensions the predictions of these models are consistent with the empirical evidence. We find that both type models fail to fully account for the data and argue that a model that combines aspects of both might be more succesfull.