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Using subjective income expectations to test for excess sensitivity of consumption to predicted income growth

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  • Jappelli, Tullio
  • Pistaferri, Luigi

Abstract

We test for excess sensitivity of consumption to predicted income growth using a 1989–93 panel survey of Italian households that includes measures of subjective income and inflation expectations. These expectations provide a powerful instrument for predicting income growth. Controlling for the expected variance of consumption growth and for predictable changes in labour supply, we find that household consumption growth is very strongly correlated with predicted earnings growth of the head. We also find considerable evidence that excess sensitivity is due to liquidity constraints. Our strongest result is that in a sample of low-asset households the coefficient of expected income increases is one, while that of expected income declines is zero.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 44 (2000)
Issue (Month): 2 (February)
Pages: 337-358

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Handle: RePEc:eee:eecrev:v:44:y:2000:i:2:p:337-358

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  8. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier.
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  13. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(6), pages 1104-13, December.
  14. Giucca, P. & Jappelli, T. & Terlizzese, D., 1992. "Earning Uncertainty and Precautionary Saving," Papers, Banca Italia - Servizio di Studi 161, Banca Italia - Servizio di Studi.
  15. Shea, John, 1995. "Union Contracts and the Life-Cycle/Permanent-Income Hypothesis," American Economic Review, American Economic Association, American Economic Association, vol. 85(1), pages 186-200, March.
  16. Jeff Dominitz & Charles F. Manski, 1994. "Using Expectations Data to Study Subjective Income Expectations," Econometrics, EconWPA 9411003, EconWPA.
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