Tag Archives: consumption asymmetry

Do consumers respond in the same way to good and bad income surprises?

Philip Bunn, Jeanne Le Roux, Kate Reinold and Paolo Surico.

If you unexpectedly received £1000 of extra income this year, how much of it would you spend? All? Half? None? Now, by how much would you cut your spending if it had been an unexpected fall in income? Standard economic theory (for example the ‘permanent income hypothesis’) suggests that your answers should be symmetric. But there are good reasons to think that they might not be, for example in the face of limits on borrowing or uncertainty about future income. That is backed up by new survey evidence, which finds that an unanticipated fall in income leads to consumption changes which are significantly larger than the consumption changes associated with an income rise of the same size.

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Filed under Macroeconomics, Monetary Policy