The Consumption Response to Predictable Changes in Discretionary Income: Evidence from the Repayment of Vehicle Loans
NBER Working Paper No. 9976
Whether households smooth' consumption in response to predictable changes in income is an open and contentious question. This paper examines the consumption reaction to predictable increases in discretionary income following the final payment of a vehicle loan. Using data from the Consumer Expenditure Survey, the results show that a 10 percent increase in discretionary income due to a loan repayment leads to a 2 to 3.5 percent increase in non-durable consumption. Additional analysis suggests that these findings may be explained by the presence of borrowing constraints.
Published: Stephens Jr., Melvin. "The Consumption Response to Predictable Changes in Discretionary Income: Evidence from the Repayment of Vehicle Loans." The Review of Economics and Statistics 90, 2 (May 2008): 241-252.