Household Heterogeneity and Consumption Dynamics in the Presence of Borrowing and Liquidity Constraints

I study the effects of borrowing and liquidity constraints on the response of consumption toanticipated income changes. Using the PSID over 1999–2013, I find that the well-documentedstrong excess sensitivity of consumption to income of highly constrained households can beexplained by episodes of income increases. In addition, I look into the heterogeneity of householdswithout debt, a group that has been largely disregarded by the literature. My fixed-effectsestimates show that only those without debt tend to increase their saving in response toanticipated income declines, irrespective of the amount of liquid assets held