Idiosyncratic labour income risk and aggregate consumption: An unobserved component approach
AbstractWe investigate the importance of aggregate and consumer-specific or idiosyncratic labour income risk for aggregate consumption changes in the US over the period 1952-2001. Theoretically, the effect of labour income risk on consumption changes is decomposed into an aggregate and into an idiosyncratic part. Empirically, aggregate risk is modelled through a GARCH process on aggregate labour income shocks and individual risk is modelled as an unobserved component and obtained through Kalman filtering. Our results suggest that aggregate labour income risk explains a negligible fraction of the variance of aggregate consumption changes. A more important part of aggregate consumption changes is explained by the unobserved component. The interpretation of this component as reflecting idiosyncratic labour income risk is supported by the finding that it is negatively affected by received consumer transfers. Idiosyncratic labour income risk thus matters for the aggregate economy.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Macroeconomics.
Volume (Year): 32 (2010)
Issue (Month): 1 (March)
Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/622617
Labour income uncertainty Consumption Precaution State space models GARCH errors Unobserved component Bayesian;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244.
- Bacchetta, Philippe & Gerlach, Stefan, 1997.
"Consumption and credit constraints: International evidence,"
Journal of Monetary Economics,
Elsevier, vol. 40(2), pages 207-238, October.
- Philippe BACCHETTA & Stefan GERLACH, 1997. "Consumption and Credit Constraints : International Evidence," Cahiers de Recherches Economiques du DÃ©partement d'EconomÃ©trie et d'Economie politique (DEEP) 9707, Université de Lausanne, Faculté des HEC, DEEP.
- Bacchetta, Philippe & Gerlach, Stefan, 1997. "Consumption and Credit Constraints: International evidence," CEPR Discussion Papers 1727, C.E.P.R. Discussion Papers.
- Banks, James & Blundell, Richard & Brugiavini, Agar, 2001.
"Risk Pooling, Precautionary Saving and Consumption Growth,"
Review of Economic Studies,
Wiley Blackwell, vol. 68(4), pages 757-79, October.
- James Banks & Richard Blundell & Agar Brugiavini, 1999. "Risk pooling, precautionary saving and consumption growth," IFS Working Papers W99/19, Institute for Fiscal Studies.
- Pierre-Olivier Gourinchas & Jonathan A. Parker, 2001.
"The Empirical Importance of Precautionary Saving,"
NBER Working Papers
8107, National Bureau of Economic Research, Inc.
- Jonathan Parker & Bruce Preston, 2002.
"Precautionary Saving and Consumption Fluctuations,"
NBER Working Papers
9196, National Bureau of Economic Research, Inc.
- Sydney Ludvigson, 1999.
"Consumption And Credit: A Model Of Time-Varying Liquidity Constraints,"
The Review of Economics and Statistics,
MIT Press, vol. 81(3), pages 434-447, August.
- Sydney Ludvigson, 1996. "Consumption and credit: a model of time-varying liquidity constraints," Research Paper 9624, Federal Reserve Bank of New York.
- Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
- Caballero, R.J., 1988.
"Consumption Puzzles And Precautionary Savings,"
1988_05, Columbia University, Department of Economics.
- David Demery & Nigel W. Duck, 2000. "Incomplete information and the time series behaviour of consumption," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(4), pages 355-366.
- Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, vol. 112(3), pages 695-717, June.
- Campbell, John Y & Mankiw, N Gregory, 1990.
"Permanent Income, Current Income, and Consumption,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 8(3), pages 265-79, July.
- John Y. Campbell & N. Gregory Mankiw, 1991. "Permanent Income, Current Income, and Consumption," NBER Working Papers 2436, National Bureau of Economic Research, Inc.
- Campbell, John Y. & Mankiw, N. Gregory, 1990. "Permanent Income, Current Income, and Consumption," Scholarly Articles 3353762, Harvard University Department of Economics.
- Durbin, James & Koopman, Siem Jan, 2001.
"Time Series Analysis by State Space Methods,"
Oxford University Press, number 9780198523543.
- Tom Doan, . "SEASONALDLM: RATS procedure to create the matrices for the seasonal component of a DLM," Statistical Software Components RTS00251, Boston College Department of Economics.
- Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, .
"Precautionary Saving and Social Insurance,"
Rodney L. White Center for Financial Research Working Papers
3-95, Wharton School Rodney L. White Center for Financial Research.
- R. Glenn Hubbard & Jonathan Skinner & Stephen P. Zeldes, 1995. "Precautionary Saving and Social Insurance," NBER Working Papers 4884, National Bureau of Economic Research, Inc.
- Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 03-95, Wharton School Rodney L. White Center for Financial Research.
- Sydney Ludvigson & Martin Lettau, 1999.
"Consumption, aggregate wealth and expected stock returns,"
77, Federal Reserve Bank of New York.
- Martin Lettau, 2001. "Consumption, Aggregate Wealth, and Expected Stock Returns," Journal of Finance, American Finance Association, vol. 56(3), pages 815-849, 06.
- Lettau, Martin & Ludvigson, Sydney, 1999. "Consumption, Aggregate Wealth and Expected Stock Returns," CEPR Discussion Papers 2223, C.E.P.R. Discussion Papers.
- Robert E. Hall, 1988.
"Intertemporal Substitution in Consumption,"
NBER Working Papers
0720, National Bureau of Economic Research, Inc.
- Gert Peersman & Lorenzo Pozzi, 2007.
"Business cycle fluctuations and excess sensitivity of private consumption,"
Bank of England working papers
335, Bank of England.
- Gert Peersman & Lorenzo Pozzi, 2008. "Business Cycle Fluctuations and Excess Sensitivity of Private Consumption," Economica, London School of Economics and Political Science, vol. 75(299), pages 514-523, 08.
- Engen, Eric M. & Gruber, Jonathan, 2001. "Unemployment insurance and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 545-579, June.
- Costas Meghir & Luigi Pistaferri, 2004.
"Income Variance Dynamics and Heterogeneity,"
Econometric Society, vol. 72(1), pages 1-32, 01.
- Giorgio Primiceri & Thijs van Rens, 2002.
"Inequality over the business cycle: Estimating income risk using micro-data on consumption,"
Economics Working Papers
943, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2004.
- Giorgio Primiceri & Thijs van Rens, 2002. "Inequality over the Business Cycle: Estimating Income Risk using Micro-Data on Consumption," Macroeconomics 0212003, EconWPA.
- Joon-Ho Hahm & Douglas G. Steigerwald, 1999. "Consumption Adjustment under Time-Varying Income Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 32-40, February.
- Harvey, Andrew & Ruiz, Esther & Sentana, Enrique, 1992. "Unobserved component time series models with Arch disturbances," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 129-157.
- Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, January.
- 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 971-87, December.
- Marjorie Flavin, 1985. "Excess Sensitivity of Consumption to Current Income: Liquidity Constraints or Myopia?," Canadian Journal of Economics, Canadian Economics Association, vol. 18(1), pages 117-36, February.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.