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Evaluating how predictable errors in expected income affect consumption

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  • Luigi Giamboni
  • Emanuele Millemaci
  • Robert J. Waldmann

Abstract

This article studies whether anomalies in consumption can be explained by a behavioural model in which agents make predictable errors in forecasting income. We use a micro-data set containing subjective expectations about future income. This article shows that the null hypothesis of rational expectations is rejected in favour of the behavioural model, since consumption responds to predictable forecast errors. On average, agents who we predict are too pessimistic increase consumption after the predictable positive income shock. On average, agents who are too optimistic reduce the consumption.

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File URL: http://hdl.handle.net/10.1080/00036846.2012.745987
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 45 (2013)
Issue (Month): 28 (October)
Pages: 4004-4021

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Handle: RePEc:taf:applec:v:45:y:2013:i:28:p:4004-4021

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  1. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
  2. 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.
  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.
  4. Das, Marcel & Donkers, Bas, 1999. "How Certain Are Dutch Households about Future Income? An Empirical Analysis," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 45(3), pages 325-38, September.
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  7. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
  8. Dominitz, Jeff, 2001. "Estimation of income expectations models using expectations and realization data," Journal of Econometrics, Elsevier, vol. 102(2), pages 165-195, June.
  9. 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.
  10. 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.
  11. Marjorie A. Flavin, 1991. "The Joint Consumption/Asset Demand Decision: A Case Study in Robust Estimation," NBER Working Papers 3802, National Bureau of Economic Research, Inc.
  12. Marjorie Flavin, 1999. "Robust Estimation of the Joint Consumption / Asset Demand Decision," NBER Working Papers 7011, National Bureau of Economic Research, Inc.
  13. Jeff Dominitz, 1998. "Earnings Expectations, Revisions, And Realizations," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 374-388, August.
  14. 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.
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  1. I am storing pdf's at google sites so you can see my research
    by Robert in Robert's Stochastic Thoughts on 2009-03-16 11:09:00
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Cited by:
  1. Albert Solé-Ollé & Elisabet Viladecans-Marsal, 2011. "Local spending and the housing boom," Working Papers 2011/27, Institut d'Economia de Barcelona (IEB).
  2. Emanuele Millemaci & Robert J. Waldmann, 2008. "Dynamically Inconsistent Preferences and Money Demand," CEIS Research Paper 129, Tor Vergata University, CEIS, revised 09 Sep 2008.

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