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Robust Estimation of the Joint Consumption / Asset Demand Decision

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  • Marjorie Flavin
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    Abstract

    The paper proposes an instrumental variables version of the Huber estimator as an alternative to the IV-Krasker Welsch estimator. The IV-Huber estimator is analytically and computationally much simpler than IV-Krasker Welsch. In the context of an empirical study of the importance of borrowing constraints on consumption, the paper reports the results for the following estimators: 1) conventional (non-robust) IV, 2) conventional IV after the subjective rejection of outliers, 3) conventional IV after trimming, 4) IV-Huber, and 5) IV-Krasker-Welsch. In the presence of a heavy-tailed error distribution, both the IV-Krasker Welsch and the IV-Huber estimators provide substantial improvements in efficiency over conventional IV. Further, the informal robust procedure of using conventional IV after trimming does not match the efficiency gains of the formal robust methods. The empirical results indicate that households exhibit incomplete smoothing of consumption, with about 20-50% of predictable movements in income being buffered by asset stocks. When saving is disaggregated by type of asset, the results provide some evidence of borrowing constraints: households which are not subject to a liquidity constraint use financial assets as their primary means of buffering income fluctuations, while constrained households use purchases of durable goods almost exclusively as the vehicle for consumption smoothing.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7011.

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    Date of creation: Mar 1999
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    Handle: RePEc:nbr:nberwo:7011

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    Cited by:
    1. Giamboni, Luigi & Millemaci, Emanuele & Waldmann, Robert, 2007. "Evaluating how predictable errors in expected income affect consumption," MPRA Paper 12939, University Library of Munich, Germany.
    2. Yasuyuki Sawada, 2007. "The impact of natural and manmade disasters on household welfare," Agricultural Economics, International Association of Agricultural Economists, vol. 37(s1), pages 59-73, December.
    3. Yasuyuki Sawada & Satoshi Shimizutani, 2005. "Are People Insured Against Natural Disasters? Evidence from the Great Hanshin-Awaji (Kobe) Earthquake in 1995," CARF F-Series, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo CARF-F-019, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    4. Kochar, Anjini, 2004. "Ill-health, savings and portfolio choices in developing economies," Journal of Development Economics, Elsevier, Elsevier, vol. 73(1), pages 257-285, February.
    5. Limosani, Michele & Millemaci, Emanuele, 2011. "Evidence on excess sensitivity of consumption to predictable income growth," Research in Economics, Elsevier, Elsevier, vol. 65(2), pages 71-77, June.
    6. Christophe Muller & Tae-Hwan Kim, 2005. "Two-Stage Huber Estimation," Working Papers. Serie AD, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) 2005-17, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

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