Current consumption and future income growth: Synthetic panel evidence

Abstract

Using group means computed from 20 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: in variation across cohort-education groups, in variation over the life cycle, and in variation over the business cycle. While other explanations are explored, the results are likely due to forward-looking households altering their current consumption in response to information they receive about their income years into the future, information that turns out to be accurate. © 2006 Elsevier B.V. All rights reserved.