Household Consumption in a Developing Country and its Response to External Shocks

Using household-level data from Thailand, I document the existence of non-homothetic preferences and consumption smoothing. I find that households consume a higher share of food items at lower budget levels and a higher share of non-food items at higher budget. Households in Thailand can smooth consumption to a large extent, but not perfectly. I then investigate household consumption response to a government spending shock and a negative productivity shock, identified via drought. A significant result isthat the marginal propensity to consume (MPC) given a government spending shock isdecreasing in the liquidity of a household and financial development of the region. I find that food consumption falls during a drought shock, with no significant change in non-food consumption. I also discuss different margins of adjustment such as labor supply, scale of business, and balance sheet adjustments response that households may employ to ensure consumption smoothing during a drought.Doctor of Philosoph