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Consumption and Income Smoothing

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Author Info
Francesco Busato
Bruno Chiarini
Elisabetta Marzano

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Abstract

This paper presents a two sector dynamic general equilibrium model in which income smoothing takes place within the households (intra-temporally), and consumption smoothing takes place among the households (inter-temporally). Idiosyncratic risk sharing within the family is based on an income smoothing contract. There are two sectors in the model, the regular sector and the underground sector, and the smoothing comes from the underground sector, which is countercyclical with respect aggregate GDP. The paper shows that the simulated disaggregated consumption and income series (that are the regular and underground consumption flows) are more sensitive to exogenous changes in sector-specific productivity and tax rates than regular and underground income flows, and that this picture is reversed when the aggregate series are considered.

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Paper provided by D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy in its series Discussion Papers with number 13_2006.

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Date of creation: 01 Jul 2006
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Handle: RePEc:prt:dpaper:13_2006

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  2. 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. [Downloadable!] (restricted)
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  5. Andrew B. Abel & Laurence J. Kotlikoff, 1994. "Does the Consumption of Different Age Groups Move Together? A New Nonparametric Test of Intergenerational Altruism," NBER Working Papers 2490, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Lawrence J. Christiano, 1987. "Why is consumption less volatile than income?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-20. [Downloadable!]
  10. Mankiw, N. Gregory, 1982. "Hall's consumption hypothesis and durable goods," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 417-425. [Downloadable!] (restricted)
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  14. Rajnish Mehra, 2006. "Recursive Competitive Equilibrium," NBER Working Papers 12433, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Martin Lettau & Harald Uhlig, 1999. "Rules of Thumb versus Dynamic Programming," American Economic Review, American Economic Association, vol. 89(1), pages 148-174, March. [Downloadable!] (restricted)
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  17. Davidson, James E. H. & Hendry, David F., 1981. "Interpreting econometric evidence : The behaviour of consumers' expenditure in the UK," European Economic Review, Elsevier, vol. 16(1), pages 177-192. [Downloadable!] (restricted)
  18. Danthine, J.P. & Donaldson, J.B., 1993. "Computing Equilibria of Non-Optimal Economies," Papers 93-01a, Columbia - Graduate School of Business.
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  19. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
  20. Fumio Hayashi, 1989. "Is Japan's saving rate high?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-9. [Downloadable!]
  21. Cho, Jang-Ok & Rogerson, Richard, 1988. "Family labor supply and aggregate fluctuations," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 233-245. [Downloadable!] (restricted)
  22. King, Robert G. & Rebelo, Sergio T., 1999. "Resuscitating real business cycles," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 14, pages 927-1007 Elsevier. [Downloadable!] (restricted)
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  23. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October. [Downloadable!] (restricted)
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