Essays on the Macroeconomic Effects of Consumption Heterogeneity

Abstract

This dissertation seeks to advance our understanding of the macroeconomic effects of heterogeneity in consumption.

In the first chapter, I study quantitatively how a credit crunch affects aggregate consumption when households are heterogeneous in their wealth levels. I model credit conditions through either a “hard constraint", where households are allowed to borrow at the risk free rate only up to an exogenous amount, or a “soft constraint", where households can borrow as much as they want but the borrowing interest rate is greater than the savings interest rate. I find that a tightening of borrowing conditions delivers a much more severe drop in aggregate consumption in the hard constraint economy. I conclude that the quantitative effects of a credit crunch largely depend on the modeling approach.

In the second chapter, I assess whether the minimum wage could increase aggregate consumption through redistribution towards poor, high-marginal propensity to consume workers. I use retail sales data by county and I exploit heterogeneity in minimum wage rates across states and over time to estimate the causal effect of the minimum wage on nondurable consumption in a panel data research design. I find that an increase of 10% in the minimum wage rate increases nominal sales by 1.1% and real sales by 0.7%. The response to minimum wage hikes is stronger in counties where the policy is more binding. I show that my results are explained by positive spillovers benefiting the bottom quarter of the labor income distribution.

In the third chapter, I study the labor intensity of the expenditure response to unemployment. First, I show that different consumption goods are produced with very different labor shares. While communications, housing, and utilities have a labor share lower than 0.4, the labor share of domestic services, education, and health care is greater than 0.7. Second, I find that upon unemployment, households disproportionately cut back expenditures on labor-intensive goods. I explore the implications for fiscal stimulus in a heterogeneous agent New Keynesian model. The model suggests that targeting fiscal policy towards labor-intensive goods can be significantly more effective than capital-intensive government purchases.