I show theoretically and empirically that, everything else being equal, people with a higher permanent income respond more to transitory shocks. The theoretical intuition is that, comparing individuals with the same net wealth and transitory income but a different permanent income, those with a higher permanent income consume more and finance a larger share of their consumption out of their uncertain future income. A wealth loss or transitory income loss increases the precariousness of their position more and obliges them to adjust up their savings and cut their consumption more. This prediction holds true in the New York Fed Survey of Consumer Expectations: an increase in permanent income by one standard-deviation raises people's consumption response by 0.03. Numerical simulations establish that the model accounts for the empirical results quantitatively, not just qualitatively.

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