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Stochastic Components of Individual Consumption: A Time Series Analysis of Grouped Data

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  • Orazio Attanasio
  • Margherita Borella

Abstract

In this paper we propose a method to characterize the time series properties of individual consumption, income and interest rates using micro data, as studies in labour economics have characterized the time series properties of hours and earnings. Our approach, however, does not remove aggregate shocks. Having estimated the parameters of a flexible multivariate MA representation we relate the coefficients of our statistical model to structural parameters of theoretical models of consumption behaviour. Our approach offers a unifying framework that encompasses the Euler equation approach to the study of consumption and the studies that relate innovations to income to innovations to consumption, such as those that have found the so-called excess smoothness of consumption. Using a long time series of cross sections to construct synthetic panel data for the UK, we estimate our model and find that the restriction of Euler equations are typically not rejected, while the data show ‘excess smoothness’.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12456.

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Date of creation: Aug 2006
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Handle: RePEc:nbr:nberwo:12456

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  1. Attanasio, O.P. & Browning, M., 1993. "Consumption Over the Life Cycle and Over the Business Cycle," Papers, Tilburg - Center for Economic Research 9314, Tilburg - Center for Economic Research.
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  25. Orazio Attanasio & Nicola Pavoni, 2008. "Risk Sharing in Private Information Models with Asset Accumulation: Explaining the Excess Smoothness of Consumption," Carlo Alberto Notebooks, Collegio Carlo Alberto 103, Collegio Carlo Alberto.
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  30. Watson, Mark W., 1986. "Univariate detrending methods with stochastic trends," Journal of Monetary Economics, Elsevier, Elsevier, vol. 18(1), pages 49-75, July.
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  32. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(6), pages 971-87, December.
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Cited by:
  1. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," NBER Working Papers 15756, National Bureau of Economic Research, Inc.
  2. Orazio Attanasio & Nicola Pavoni, 2008. "Risk Sharing in Private Information Models with Asset Accumulation: Explaining the Excess Smoothness of Consumption," Carlo Alberto Notebooks, Collegio Carlo Alberto 103, Collegio Carlo Alberto.

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