Advanced Search
MyIDEAS: Login

Expected Versus Realized Income Changes: A Test of the Rational Expectation Hypothesis

Contents:

Author Info

  • Das, J.W.M.
  • Soest, A.H.O. van

    (Tilburg University, Center for Economic Research)

Abstract

We analyze answers to household survey questions on whether the respondents' household income has changed in the past twelve months, and on whether the respondents expect their household income to change in the next twelve months. Both questions are answered on a discrete five points scale.The data are an unbalanced panel of eleven consecutive annual waves.Using cross-tabulations of expected and realized changes, we first test the "best-case" hypothesis.This hypothesis implies, under two different nonparametric assumptions on how respondents form their predictions, that respondents have rational expectations, that there are no common unexpected shocks, and that reported expectations are best predictions of future outcomes.We find that the best case hypothesis is rejected: for all years, too many respondents who predict an income fall, ex post report that their household income has not changed.We then construct a bivariate ordered probit random effects panel data model, in which we explain both expectations and realizations from background variables such as age, education level, and labour market status, and from the one year lagged expectation and realization.We show that the hypothesis of rational expectations implies certain restrictions on the parameters in the two equations of this model.The model is estimated by simulated maximum likelihood using the Geweke-Hajivassilou-Keane (GHK) method.The hypothesis of rational expectations is rejected.The hypotheses that expectations are adaptive or naive can be tested in a similar way, and are also rejected.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://arno.uvt.nl/show.cgi?fid=4155
Download Restriction: no

Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2000-105.

as in new window
Length:
Date of creation: 2000
Date of revision:
Handle: RePEc:dgr:kubcen:2000105

Contact details of provider:
Web page: http://center.uvt.nl

Related research

Keywords: household incomes; rational expectations; panel data; maximum likelihood; JEL classifications;

References

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.:
as in new window
  1. Das, J.W.M. & Dominitz, J. & Soest, A.H.O. van, 1997. "Comparing Predictions and Outcomes: Theory and Application to Income Changes," Discussion Paper 1997-45, Tilburg University, Center for Economic Research.
  2. Alessie, Rob & Lusardi, Annamaria, 1997. "Saving and income smoothing: Evidence from panel data," European Economic Review, Elsevier, vol. 41(7), pages 1251-1279, July.
  3. repec:att:wimass:8905 is not listed on IDEAS
  4. Hajivassiliou, Vassilis A & Ruud, Paul A., 1993. "Classical Estimation Methods for LDV Models Using Simulation," Department of Economics, Working Paper Series qt3cg196fr, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Das, Marcel & van Soest, Arthur, 1999. "A panel data model for subjective information on household income growth," Journal of Economic Behavior & Organization, Elsevier, vol. 40(4), pages 409-426, December.
  6. Das, J.W.M. & Soest, A.H.O. van, 1995. "Expected and realized income changes: Evidence from the Dutch socio-economic panel," Discussion Paper 1995-52, Tilburg University, Center for Economic Research.
  7. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994. "Income Risk, Borrowing Constraints and Portfolio Choice," CEPR Discussion Papers 888, C.E.P.R. Discussion Papers.
  8. Keane, Michael, 1993. "Simulation estimation for panel data models with limited dependent variables," MPRA Paper 53029, University Library of Munich, Germany.
  9. Ivaldi, Marc, 1992. "Survey Evidence on the Rationality of Expectations," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(3), pages 225-41, July-Sept.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Benitez-Silva, Hugo & Dwyer, Debra S., 2006. "Expectation formation of older married couples and the rational expectations hypothesis," Labour Economics, Elsevier, vol. 13(2), pages 191-218, April.
  2. Ramos, Xavi & Schluter, Christian, 2006. "Subjective Income Expectations and Income Risk," IZA Discussion Papers 1950, Institute for the Study of Labor (IZA).
  3. Xavi Ramos & Christian Schluter, 2003. "Subjective Income Expectations, Canonical Models and Income Risk," Working Papers wpdea0310, Department of Applied Economics at Universitat Autonoma of Barcelona.
  4. R Alessie & A Kapteyn, 2001. "New data for understanding saving," Oxford Review of Economic Policy, Oxford University Press, vol. 17(1), pages 55-69, Spring.
  5. Hugo Benítez-Silva & Debra Dwyer & Wayne-Roy Gayle & Thomas Muench, 2008. "Expectations in micro data: rationality revisited," Empirical Economics, Springer, vol. 34(2), pages 381-416, March.
  6. Mauro Mastrogiacomo, 2006. "Testing consumers' asymmetric reaction to wealth changes," CPB Discussion Paper 53, CPB Netherlands Bureau for Economic Policy Analysis.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:dgr:kubcen:2000105. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Broekman).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.