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Looking for the News in the Noise. Additional Stochastic Implications of Optimal Consumption Choise

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  • Laurence J. Kotlikoff
  • Ariél Pakes

Abstract

In neoclassical models of consumption choice under earnings uncertainty changes in consumption programs from one period to the next are determined by new information received about future earnings over the period. This proposition suggests that actual consumption choices imbed extractable information about the extent and time resolution of earnings uncertainty. The primary goal of this paper is to demonstrate how one can infer the extent of earnings uncertainty from information on consumption choices. We obtain a theoretical relationship between the revision in the present expected value of consumption (noise) and the revision in the expectation of lifetime earnings (news) that can be used to measure subjective earnings uncertainty.

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  • Laurence J. Kotlikoff & Ariél Pakes, 1988. "Looking for the News in the Noise. Additional Stochastic Implications of Optimal Consumption Choise," Annals of Economics and Statistics, GENES, issue 9, pages 29-46.
    • Handle: RePEc:adr:anecst:y:1988:i:9:p:29-46
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    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Sargent, Thomas J, 1978. "Rational Expectations, Econometric Exogeneity, and Consumption," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 673-700, August.
    3. Benjamin Eden & Ariél Pakes, 1981. "On Measuring the Variance-Age Profile of Lifetime Earnings," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(3), pages 385-394.
    4. N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1985. "Intertemporal Substitution in Macroeconomics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(1), pages 225-251.
    5. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-265, April.
    6. Mervyn A. King, 1983. "The Economics of Saving," NBER Working Papers 1247, National Bureau of Economic Research, Inc.
    7. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
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    Cited by:

    1. Gilbert Colletaz & Jean-Pierre Gourlaouen, 1990. "Coïntégration et structure par terme des taux d'intérêt," Revue Économique, Programme National Persée, vol. 41(4), pages 687-712.
    2. Carl E. Walsh, 1985. "Borrowing Restrictions and Wealth Constraints: Implications for Aggregate Consumption," NBER Working Papers 1629, National Bureau of Economic Research, Inc.
    3. West, Kenneth D., 1988. "The insensitivity of consumption to news about income," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 17-33, January.
    4. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.
    5. Joseph P. Dejuan & John J. Seater & Tony S. Wirjanto, 2010. "Testing the Stochastic Implications of the Permanent Income Hypothesis Using Canadian Provincial Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 72(1), pages 89-108, February.
    6. Syeda Fizza Gillani, 1996. "Risk-sharing in Rural Pakistan," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 35(1), pages 23-48.
    7. Johannes Schwarze, 1994. "Subjective Measures of Economic Well-Being and the Influence of Income Uncertainty," Discussion Papers of DIW Berlin 94, DIW Berlin, German Institute for Economic Research.

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