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Superior Information, Income Shocks and the Permanent Income Hypothesis

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Author Info
Luigi Pistaferri () (University College London, Istituto Universitario Navale, Napoli and CSEF, University of Salerno)

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Abstract

According to the permanent income hypothesis with quadratic preferences, savings should react only to transitory income shocks, but not to permanent shocks. The problem is that income shock components are not separately observable. I show how the combination of income realizations with subjective expectations can help to identify separately the transitory and the permanent shock to income, thus providing a powerful test of the theory. The empirical analysis is performed on a sample of Italian households drawn from the 1989-1991 Survey of Household Income and Wealth.

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Publisher Info
Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 07.

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Date of creation: 01 Sep 1998
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Publication status: Published in Review of Economics and Statistics, 2001, vol. 83, pages 465-476
Handle: RePEc:sef:csefwp:07

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Related research
Keywords: Subjective expectations; income shocks; permanent income hypothesis;

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Find related papers by JEL classification:
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving

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Cited by:
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  1. Giamboni Luigi, 2004. "Do husbands’ and wives’ predictions irrationally diverge?," Departmental Working Papers 203, Tor Vergata University, CEIS. [Downloadable!]
  2. Xavier Ramos & Christian Schluter, 2006. "Subjective Income Expectations and Income Risk," IZA Discussion Papers 1950, Institute for the Study of Labor (IZA). [Downloadable!]
  3. Xavier Ramos & Christian Schluter, 2003. "Subjective Income Expectations, Canonical Models and Income Risk," Working Papers wpdea0310, Department of Applied Economics at Universitat Autonoma of Barcelona. [Downloadable!]
  4. Cunha, Flavio & Heckman, James & Navarro, Salvador, 2004. "Separating Uncertainty from Heterogeneity in Life Cycle Earnings," IZA Discussion Papers 1437, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
  5. Mario Padula, 2000. "Excess Smoothness and Durable Goods: Evidence from Subjective Expectations Data," CSEF Working Papers 38, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
  6. Erich Battistin & Raffaele Miniaci & Guglielmo Weber, 2003. "What do we learn from recall consumption data?," Temi di discussione (Economic working papers) 466, Bank of Italy, Economic Research Department. [Downloadable!]
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  7. Hamish Low & Costas Meghir & Luigi Pistaferri, 2006. "Wage risk and employment risk over the life cycle," IFS Working Papers W06/27, Institute for Fiscal Studies. [Downloadable!]
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  8. Giamboni Luigi & Waldmann Robert, 2004. "A behavioral model of consumption," Departmental Working Papers 202, Tor Vergata University, CEIS. [Downloadable!]
  9. Harounan Kazianga & Christopher Udry, 2004. "Consumption Smoothing? Livestock, Insurance and Drought in Rural Burkina Faso," Working Papers 898, Economic Growth Center, Yale University. [Downloadable!]
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  10. Michael G. Palumbo & John A. James & Mark Thomas, 1999. "Consumption smoothing among working-class American families before social insurance," Finance and Economics Discussion Series 1999-24, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  11. Mika Kuismanen & Luigi Pistaferri, 2006. "Information, habits, and consumption behavior - evidence from micro data," Working Paper Series 572, European Central Bank. [Downloadable!]
  12. Rodepeter, Ralf & Winter, Joachim, 1998. "Savings decisions under life-time and earnings uncertainty:," Sonderforschungsbereich 504 Publications 98-58, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  13. Pistaferri, Luigi, 2002. "Anticipated and Unanticipated Wage Changes, Wage Risk, and Intertemporal Labour Supply," CEPR Discussion Papers 3628, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  14. Forslund, Anders & Nordström Skans, Oskar, 2006. "Swedish youth labour market policies revisited," Working Paper Series 2006:6, IFAU - Institute for Labour Market Policy Evaluation. [Downloadable!]
    Other versions:
  15. Alpo Willman, 2007. "Sequential optimization, front-loaded information, and U.S. consumption," Working Paper Series 765, European Central Bank. [Downloadable!]
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