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Using Subjective Income Expectations to Test for Excess Sensitivity of Consumption to Predicted Income Growth

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Abstract

We test for precautionary saving and excess sensitivity of consumption to predicted income growth using a 1989-93 panel survey of Italian households that has measures of subjective income and inflation expectations. These expectations provide a powerful instrument for predicting income growth. The empirical specification controls for predictable changes in labor supply and allows a fairly general specification for the stochastic structure of the forecast error. We find that consumption growth is positively correlated with the expected variance of income and uncorrelated with predicted income growth. Overall, the results support the precautionary saving model

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Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 12.

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Date of creation: 01 Dec 1998
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Publication status: Published in European Economic Review, February 2000, vol. 44, pages 337-358
Handle: RePEc:sef:csefwp:12

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Keywords: Subjective expectations; precautionary saving; excess sensitivity;

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  10. Orazio P. Attanasio & Guglielmo Weber, 1994. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," NBER Working Papers 4795, National Bureau of Economic Research, Inc.
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  13. Chamberlain, Gary, 1984. "Panel data," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 22, pages 1247-1318 Elsevier.
  14. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Journal of Economic Literature, American Economic Association, vol. 34(4), pages 1797-1855, December.
  15. Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc.
  16. Meghir, Costas & Weber, Guglielmo, 1996. "Intertemporal Nonseparability or Borrowing Restrictions? A Disaggregate Analysis Using a U.S. Consumption Panel," Econometrica, Econometric Society, vol. 64(5), pages 1151-81, September.
  17. Karen E. Dynan, 1993. "How prudent are consumers?," Working Paper Series / Economic Activity Section 135, Board of Governors of the Federal Reserve System (U.S.).
  18. Lusardi, Annamaria, 1996. "Permanent Income, Current Income, and Consumption: Evidence from Two Panel Data Sets," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(1), pages 81-90, January.
  19. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
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