Current Consumption and Future Income Growth: Synthetic Panel Evidence (PDF)

Using group means computed from twenty years of high quality survey data, I show a strong and robust relation between households' consumption growth and subsequent realizations of their income growth, including realizations as distant as six years later.  The relation appears in multiple types of variation in income growth: variation across cohort-education groups, variation over the life cycle, and even some variation over the business cycle.  The results may be evidence of forward-looking households altering their current consumption in response to information they receive about their future income; other interpretations are explored as well.  

Note: Includes data appendix.

Jeremy J. Nalewaik

Modified Published