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Incomplete information and the time series behaviour of consumption

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Author Info
David Demery (Department of Economics, University of Bristol, 8 Woodland Road, Bristol, BS8 1TN, UK)
Nigel W. Duck (Department of Economics, University of Bristol, 8 Woodland Road, Bristol, BS8 1TN, UK)
Abstract

Pischke (1995) uses both microeconomic and macroeconomic US data to test the idea that, within an otherwise standard PIH framework, ignorance by agents of aggregate labour income can account for the observed degree of excess smoothness and sensitivity in consumption. His tests involve only the second moments of aggregate consumption and labour income. In this paper our main aim is to identify and test the restrictions his model implies for aggregate consumption dynamics, using US quarterly data over the period 1959-1996, but our framework allows us also to test an earlier, related model of Goodfriend (1992). We find that both models can be formally rejected: ignorance of aggregate labour income cannot by itself account for aggregate consumption dynamics; some other relaxation of the assumptions of the standard PIH is required. We give an example of one possible such relaxation and present evidence indicating that Pischke's version of imperfect information may, within that framework, have a significant role to play. Copyright © 2000 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 15 (2000)
Issue (Month): 4 ()
Pages: 355-366
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Handle: RePEc:jae:japmet:v:15:y:2000:i:4:p:355-366

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References listed on IDEAS
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.:

  1. John H. Cochrane, 1989. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," NBER Working Papers 2730, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Altonji, Joseph G & Siow, Aloysius, 1987. "Testing the Response of Consumption to Income Changes with (Noisy) Panel Data," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 293-328, May. [Downloadable!] (restricted)
    Other versions:
  3. 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. [Downloadable!] (restricted)
    Other versions:
  4. Hayashi, Fumio, 1985. "The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1083-1113, November. [Downloadable!] (restricted)
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  5. John Y. Campbell & N. Gregory Mankiw, 1990. "Consumption, Income, and Interest Rates: Reinterpreting the Time Series Evidence," NBER Working Papers 2924, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. 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.
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  7. Campbell, John Y & Deaton, Angus, 1989. "Why Is Consumption So Smooth?," Review of Economic Studies, Blackwell Publishing, vol. 56(3), pages 357-73, July. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
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  9. Hayashi, Fumio & Sims, Christopher A, 1983. "Nearly Efficient Estimation of Time Series Models with Predetermined, but Not Exogenous, Instruments," Econometrica, Econometric Society, vol. 51(3), pages 783-98, May. [Downloadable!] (restricted)
  10. Attfield, C. L. F. & Demery, D. & Duck, N. W., 1992. "Partial adjustment and the permanent income hypothesis," European Economic Review, Elsevier, vol. 36(6), pages 1205-1222, August. [Downloadable!] (restricted)
  11. Goodfriend, Marvin, 1992. "Information-Aggregation Bias," American Economic Review, American Economic Association, vol. 82(3), pages 508-19, June. [Downloadable!] (restricted)
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  12. Pischke, J.S., 1993. "Individual Income, Incomplete Information, and Aggregate Consumption," Working papers 93-16, Massachusetts Institute of Technology (MIT), Department of Economics.
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  13. Deaton, Angus, 1991. "Saving and Liquidity Constraints," Econometrica, Econometric Society, vol. 59(5), pages 1221-48, September. [Downloadable!] (restricted)
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  14. Deaton, A. & Grosh, M., 1998. "Consumption," Papers 191, Princeton, Woodrow Wilson School - Development Studies.
  15. 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. [Downloadable!] (restricted)
  16. Christiano, Lawrence J & Eichenbaum, Martin & Marshall, David, 1991. "The Permanent Income Hypothesis Revisited," Econometrica, Econometric Society, vol. 59(2), pages 397-423, March. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. David Demery & Nigel Duck, 2002. "Optimally Rational Expectations and Macroeconomics," Bristol Economics Discussion Papers 02/533, Department of Economics, University of Bristol, UK. [Downloadable!]
  2. L. Pozzi, 2005. "Income uncertainty and aggregate consumption," Research series 200511-2, National Bank of Belgium. [Downloadable!]
  3. Lorenzo Pozzi, 2007. "Idiosyncratic Labour Income Risk and Aggregate Consumption: an Unobserved Component Approach," Tinbergen Institute Discussion Papers 07-069/2, Tinbergen Institute. [Downloadable!]
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