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Dynamic factor models of consumption, hours and income

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  • Altonji, Joseph G.
  • Martins, Ana Paula
  • Siow, Aloysius

Abstract

This paper addresses two questions. First, what are the key factors that affect a consumer's lifetime budget constraint and how do they evolve over the lifecycle? Second, how do consumers respond to changes in these factors? We examine the permanent income hypothesis and the Keynesian consumption model using a dynamic factor model of consumption, hours, wages, unemployment, and income. We show that a quarterly dynamic factor model with restrictions on the lag structure nay be used with annual panel data to account for the fact that in many micro panel data sets the variables relevant to a study are measured at different time intervals and/or are aggregates for the calendar year. By using several income indicators we are able to extend the panel data studies of Hall and Mishkin and Bernanke to allow for measurement error. We are also able to study the response of income and consumption to some of the factors which determine them. In addition, we study a dynamic factor representation of a joint lifecycle model of consumption and labor supply. We provide estimates of the effect of wages, unemployment, and other income determinants on the marginal utility of income as well as estimates of the substitution effects of wage change on labor supply and consumption.

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Bibliographic Info

Article provided by Elsevier in its journal Research in Economics.

Volume (Year): 56 (2002)
Issue (Month): 1 (June)
Pages: 3-59

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Handle: RePEc:eee:reecon:v:56:y:2002:i:1:p:3-59

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Web page: http://www.elsevier.com/locate/inca/622941

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References

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  1. K. Newey, Whitney, 1985. "Generalized method of moments specification testing," Journal of Econometrics, Elsevier, vol. 29(3), pages 229-256, September.
  2. Attfield, Clifford L F & Browning, Martin J, 1985. "A Differential Demand System, Rational Expectations and the Life Cycle Hypothesis," Econometrica, Econometric Society, vol. 53(1), pages 31-48, January.
  3. Robert E. Hall & Frederic S. Mishkin, 1980. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
  4. Hause, John C, 1980. "The Fine Structure of Earnings and the On-the-Job Training Hypothesis," Econometrica, Econometric Society, vol. 48(4), pages 1013-29, May.
  5. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
  6. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
  7. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
  8. Joseph G. Altonji & Lewis M. Segal, 1994. "Small Sample Bias in GMM Estimation of Covariance Structures," NBER Technical Working Papers 0156, National Bureau of Economic Research, Inc.
  9. Ben S. Bernanke, 1981. "Permanent Income, Liquidity, and Expenditure on Automobiles: Evidence from Panel Data," NBER Working Papers 0756, National Bureau of Economic Research, Inc.
  10. Gruber, Jonathan, 1997. "The Consumption Smoothing Benefits of Unemployment Insurance," American Economic Review, American Economic Association, vol. 87(1), pages 192-205, March.
  11. Fumio Hayashi, 1984. "The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data," NBER Working Papers 1305, National Bureau of Economic Research, Inc.
  12. Campbell, John Y & Deaton, Angus, 1989. "Why Is Consumption So Smooth?," Review of Economic Studies, Wiley Blackwell, vol. 56(3), pages 357-73, July.
  13. 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.
  14. Holbrook, Robert & Stafford, Frank P, 1971. "The Propensity to Consume Separate Types of Income: A Generalized Permanent Income Hypothesis," Econometrica, Econometric Society, vol. 39(1), pages 1-21, January.
  15. Joseph Altonji & Christina Paxson, 1985. "Job Characteristics and Hours of Work," Working Papers 578, Princeton University, Department of Economics, Industrial Relations Section..
  16. Heckman, James J & Macurdy, Thomas E, 1980. "A Life Cycle Model of Female Labour Supply," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 47-74, January.
  17. 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.
  18. Chowdhury, Gopa & Nickell, Stephen, 1985. "Hourly Earnings in the United States: Another Look at Unionization, Schooling, Sickness, and Unemployment Using PSID Data," Journal of Labor Economics, University of Chicago Press, vol. 3(1), pages 38-69, January.
  19. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier.
  20. Baker, Michael, 1997. "Growth-Rate Heterogeneity and the Covariance Structure of Life-Cycle Earnings," Journal of Labor Economics, University of Chicago Press, vol. 15(2), pages 338-75, April.
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Citations

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Cited by:
  1. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers W04/28, Institute for Fiscal Studies.
  2. Richard Blundell & Luigi Pistaferri & Ian Preston, 2002. "Partial insurance, information and consumption dynamics," IFS Working Papers W02/16, Institute for Fiscal Studies.
  3. Altonji, Joseph G & Segal, Lewis M, 1996. "Small-Sample Bias in GMM Estimation of Covariance Structures," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 353-66, July.
  4. Meghir, Costas & Pistaferri, Luigi, 2011. "Earnings, Consumption and Life Cycle Choices," Handbook of Labor Economics, Elsevier.
  5. Caner, Mehmet, 2008. "Nearly-singular design in GMM and generalized empirical likelihood estimators," Journal of Econometrics, Elsevier, vol. 144(2), pages 511-523, June.
  6. Meghir, Costas & Pistaferri, Luigi, 2002. "Income Variance Dynamics and Heterogeneity," CEPR Discussion Papers 3632, C.E.P.R. Discussion Papers.
  7. Louis-Philippe Morin, 2010. "Estimating the Benefit of High School for College-Bound Students," Working Papers 1002E, University of Ottawa, Department of Economics.
  8. González, Roberto & Sala, Hector, 2011. "The Frisch Elasticity in the Mercosur Countries: A Pseudo-Panel Approach," IZA Discussion Papers 5993, Institute for the Study of Labor (IZA).
  9. Faria, Joao Ricardo & Leon-Ledesma, Miguel A., 2005. "Real exchange rate and employment performance in an open economy," Research in Economics, Elsevier, vol. 59(1), pages 67-80, March.
  10. Orazio Attanasio & Margherita Borella, 2006. "Stochastic Components of Individual Consumption: A Time Series Analysis of Grouped Data," NBER Working Papers 12456, National Bureau of Economic Research, Inc.
  11. Ivan Vidangos, 2009. "Fluctuations in individual labor income: a panel VAR analysis," Finance and Economics Discussion Series 2009-09, Board of Governors of the Federal Reserve System (U.S.).
  12. Morin, Louis-Philippe, 2010. "Estimating the BenefiÂ…t of High School for College-Bound Students," CLSSRN working papers clsrn_admin-2010-3, Vancouver School of Economics, revised 30 Jan 2010.

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