Center for the Study of Energy Markets

Home energy costs comprise a significant fraction of household budgets, particularly for poor families. This paper analyzes how household consumption responds to changes in home energy outlays over the course of the year. We specify Euler equations describing nondurable and food consumption and then rely on changes in energy prices and weather severity to identify exogenous changes in disposable income. We distinguish changes in energy spending that are anticipated, for instance because it is winter in the Northeast, from those that are unanticipated, for instance because it is an unusually cold winter. We find little evidence of excess sensitivity to anticipated variation among households in the Consumer Expenditure Survey 1990-2002, even among those without substantial financial assets. However, the latter group experiences large consumption reactions to unanticipated changes.