Essays on Household Consumption and Relative Prices

Chapter one examines the cyclical behavior of low-income versus high-income household price indices and documents two new facts: (1) during recessions prices rise more for products purchased relatively more by low-income households (necessities); (2) the aggregate share of spending devoted to necessities is counter-cyclical. I present a mechanism where adverse macroeconomic shocks cause households to shift expenditure away from luxuries toward necessities, which leads to higher relative prices for necessities. I embed this mechanism into a quantitative model which explains over half of the cyclical variation in necessity prices and shares. The results suggest that low-income households are hit twice by recessions: once by the recession itself and again as their price index increases relative to other households.Chapter two presents evidence that the high estimated MPCs from the leading household studies result in implausible macroeconomic counterfactuals. Using the 2008 tax rebate as a case study, we calibrate a standard medium-scale New Keynesian model with the estimated micro MPCs to construct counterfactual macroeconomic consumption paths in the absence of a rebate. The counterfactual paths imply that consumption expenditures would have plummeted in spring and summer 2008 and then recovered when Lehman Brothers failed in September 2008. We use narratives and forecasts to argue that these paths are implausible. We go on to show that reasonable modifications of the model result in general equilibrium forces that dampen rather than amplify micro MPCs. We also show that estimators of the average treatment effect yield smaller micro MPC estimates than the standard two-way fixed effects estimators. The combination of smaller micro MPCs and dampening general equilibrium forces implies general equilibrium consumption multipliers that are below 0.2.In chapter three, I construct novel measures of household-level inflation and show that an increase in a household's personal inflation rate leads to a persistent increase in their price index. Households respond to a personal inflation shock by decreasing nominal consumption, which means their real consumption falls more than one-for-one. I also find a statisically robust relationship between inflation dispersion (the variance of household inflation rates) and the level of absolute aggregate inflation