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Intertemporal Choice and the Cross Sectional Variance of Marginal Utility

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Abstract

The theory of intertemporal choice predicts that the cross-sectional variance of the marginal utility of consumption is equal to its own lag plus a constant and a random component. Using general preference specifications and some assumptions about the nature of the random component, we provide an explicit test of this hypothesis. Our approach circumvents the necessity to identify a pure age profile of the cross sectional variance of consumption and yields a well specified statistical test. This test is applied to data from the United States, the United Kingdom and Italy. The results are remarkably consistent with the restrictions implied by the theory of intertemporal consumption choices.

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Bibliographic Info

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 06.1998.

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Date of creation: 01 Jul 1998
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Publication status: Published in Review of Economics and Statistics, February 2001, vol. 83, issue 1, pages 13-27
Handle: RePEc:sef:csefwp:06.1998

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Keywords: intertemporal choices; consumption inequality;

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  1. Richard Blundell & Ian Preston, 1997. "Consumption, inequality and income uncertainty," IFS Working Papers W97/15, Institute for Fiscal Studies.
  2. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 03-95, Wharton School Rodney L. White Center for Financial Research.
  3. Attanasio, Orazio P & Weber, Guglielmo, 1995. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1121-57, December.
  4. Orazio P. Attanasio, 1998. "Cohort Analysis of Saving Behavior by U.S. Households," Journal of Human Resources, University of Wisconsin Press, vol. 33(3), pages 575-609.
  5. Angus Deaton & Christina Paxson, 1993. "Intertemporal Choice and Inequality," NBER Working Papers 4328, National Bureau of Economic Research, Inc.
  6. Deaton, Angus, 1992. "Understanding Consumption," OUP Catalogue, Oxford University Press, number 9780198288244, September.
  7. Attanasio, Orazio P & Weber, Guglielmo, 1993. "Consumption Growth, the Interest Rate and Aggregation," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 631-49, July.
  8. Orazio Attanasio, 1993. "A cohort analysis of saving behaviour by US households," IFS Working Papers W93/04, Institute for Fiscal Studies.
  9. 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.
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Cited by:
  1. Tullio Jappelli & Luigi Pistaferri, 2004. "Intertemporal choice and consumption mobility," 2004 Meeting Papers 195, Society for Economic Dynamics.
  2. Orazio P. Attanasio & Nicola Pavoni, 2011. "Risk Sharing in Private Information Models With Asset Accumulation: Explaining the Excess Smoothness of Consumption," Econometrica, Econometric Society, vol. 79(4), pages 1027-1068, 07.
  3. Attanasio, Orazio P. & Szekely, Miguel, 2004. "Wage shocks and consumption variability in Mexico during the 1990s," Journal of Development Economics, Elsevier, vol. 73(1), pages 1-25, February.
  4. Miguel Székely & Orazio P. Attanasio, 2001. "Sacudidas salariales y variabilidad del consumo en México durante los años 90," Research Department Publications 4266, Inter-American Development Bank, Research Department.
  5. Herrala, Risto, 2010. "Credit constraints and durable consumption," Research Discussion Papers 15/2010, Bank of Finland.

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