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Unanticipated Aggregate Disturbances and Tests of the Life-Cycle Consumption Model Using Panel Data

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  • Mariger, Randall P
  • Shaw, Kathryn

Abstract

Several recent studies have used data on food consumption from the Panel Study of Income Dynamics (PSID) to test t he rational expectations life-cycle hypothesis against the alternative of prevalent liquidity constraints. These tests invoke the rational expectations restriction that income forecast errors are independent of lagged information. This restriction, however, applies only in a time-series context. It is possible that unanticipated macroeconomic disturbances cause forecast errors to be correlated.with lagged information in a cross-section of families. The authors present evidence of such a correlation in the PSID data, show that this correlation biases previous tests of the life-cycle model toward rejection, and derive a proper test of the life-cycle model using pa nel data. Copyright 1993 by MIT Press.

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Bibliographic Info

Article provided by MIT Press in its journal Review of Economics & Statistics.

Volume (Year): 75 (1993)
Issue (Month): 1 (February)
Pages: 48-56

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Handle: RePEc:tpr:restat:v:75:y:1993:i:1:p:48-56

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Web page: http://mitpress.mit.edu/journals/

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Cited by:
  1. Ziliak, James P., 1998. "Does the choice of consumption measure matter? An application to the permanent-income hypothesis," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 201-216, February.
  2. Charlotte Ostergaard & Bent E. Sorensen & Oved Yosha, 2000. "Consumption and aggregate constraints : evidence from U.S. states and Canadian provinces," Research Working Paper RWP 00-04, Federal Reserve Bank of Kansas City.
  3. Susan Dynarski & Jonathan Gruber, 1997. "Can Families Smooth Variable Earnings?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 229-303.
  4. Souleles, Nicholas S., 2002. "Consumer response to the Reagan tax cuts," Journal of Public Economics, Elsevier, vol. 85(1), pages 99-120, July.
  5. Parker, J.A., 1997. "The Reaction of Household Consumption to Predictable Changes in Payroll Tax Rates," Working papers 9724, Wisconsin Madison - Social Systems.
  6. Inoue, Atsushi & Kilian, Lutz & Kiraz, Fatma Burcu, 2006. "Do actions speak louder than words? Household expectations of inflation based on micro consumption data," Discussion Paper Series 1: Economic Studies 2006,26, Deutsche Bundesbank, Research Centre.
  7. Laura Serlenga, 2002. "Three Alternative Approaches to Test the Permanent Income Hypothesis in Dynamic Panels," series 0005, Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari, revised Feb 2002.
  8. Karen E. Dynan, 2000. "Habit Formation in Consumer Preferences: Evidence from Panel Data," American Economic Review, American Economic Association, vol. 90(3), pages 391-406, June.
  9. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
  10. DeJuan, Joseph P. & J. Seater, John, 1999. "The permanent income hypothesis:: Evidence from the consumer expenditure survey," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 351-376, April.

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