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Evidence on excess sensitivity of consumption to predictable income growth

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  • Limosani, Michele
  • Millemaci, Emanuele

Abstract

This paper tests for excess sensitivity of consumption to predicted income growth using a behavioral model that allows for myopia and/or irrationality. We use a micro-dataset containing subjective expectations about future income and subjective indicators of the families' financial condition that make us possible to evaluate the response to income changes of agents with liquidity constraint problems. We do not find significant evidence of excess sensitivity of consumption to income, as well as in the case in which we take into account liquidity constraints. Moreover, we find that agent's systematic errors are statistically significant in explaining consumption changes for all specifications considered.

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Bibliographic Info

Article provided by Elsevier in its journal Research in Economics.

Volume (Year): 65 (2011)
Issue (Month): 2 (June)
Pages: 71-77

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Handle: RePEc:eee:reecon:v:65:y:2011:i:2:p:71-77

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

Related research

Keywords: Behavioral economics Subjective expectations Rational expectations Consumption Permanent income Liquidity constraints;

References

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  1. Souleles, Nicholas S, 2004. "Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 39-72, February.
  2. Jeff Dominitz, 1998. "Earnings Expectations, Revisions, And Realizations," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 374-388, August.
  3. Luigi Pistaferri & Tullio Jappelli, 1998. "Using Subjective Income Expectations to Test for Excess Sensitivity of Consumption to Predicted Income Growth," CSEF Working Papers 12, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
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  6. Garcia, R. & Lusardi, A. & Ng, S., 1995. "Excess Sensitivity and Asymmetries in Consumption: An Empirical Investigation," Cahiers de recherche 9511, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  8. Sydney Ludvigson & Christina H. Paxson, 2001. "Approximation Bias In Linearized Euler Equations," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 242-256, May.
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  12. Marjorie Flavin, 1999. "Robust Estimation of the Joint Consumption / Asset Demand Decision," NBER Working Papers 7011, National Bureau of Economic Research, Inc.
  13. Jappelli, Tullio & Pischke, Jörn-Steffen & Souleles, Nicholas, 1995. "Testing for Liquidity Constraints in Euler Equations with Complementary Data Sources," CEPR Discussion Papers 1138, C.E.P.R. Discussion Papers.
  14. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  15. Dominitz, Jeff, 2001. "Estimation of income expectations models using expectations and realization data," Journal of Econometrics, Elsevier, vol. 102(2), pages 165-195, June.
  16. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, October.
  17. 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.
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