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Measuring consumption smoothing in CEX data

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  • Gervais, Martin
  • Klein, Paul

Abstract

This paper proposes and implements a new method of measuring the degree of consumption smoothing using data from the Consumer Expenditure Survey. The structure of this Survey is such that estimators previously used in the literature are inconsistent, simply because income is measured annually and consumption is measured quarterly. We impose an AR(1) structure on the income process to obtain a proxy for quarterly income through a projection on annual income. By construction, this proxy gives rise to a measurement error which is orthogonal to the proxy itself - as opposed to the unobserved regressor - leading to a consistent estimator. We contrast our estimates with the output of two estimators used in the literature. We show that while the first (OLS) estimator tends to overstate the degree of risk sharing, the second (IV) estimator grossly understates it Keywords; risk sharing, consumption smoothing, income risk, projection

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Bibliographic Info

Paper provided by Economics Division, School of Social Sciences, University of Southampton in its series Discussion Paper Series In Economics And Econometrics with number 0906.

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Date of creation: 01 Jan 2009
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Handle: RePEc:stn:sotoec:0906

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  1. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers, Institute for Fiscal Studies W04/28, Institute for Fiscal Studies.
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  4. Zellner, Arnold, 1970. "Estimation of Regression Relationships Containing Unobservable Independent Variables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 441-54, October.
  5. Mace, Barbara J, 1991. "Full Insurance in the Presence of Aggregate Uncertainty," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(5), pages 928-56, October.
  6. Erich Battistin, 2002. "Errors in Survey Reports of Consumption Expenditures," 10th International Conference on Panel Data, Berlin, July 5-6, 2002, International Conferences on Panel Data C4-2, International Conferences on Panel Data.
  7. Martin Browning & Thomas F. Crossley, 2004. "Shocks, stocks and socks: smoothing consumption over a temporary income loss," CAM Working Papers, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics 2004-05, University of Copenhagen. Department of Economics. Centre for Applied Microeconometrics.
  8. Bart Hobijn & David Lagakos, 2003. "Inflation inequality in the United States," Staff Reports, Federal Reserve Bank of New York 173, Federal Reserve Bank of New York.
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  13. Kjetil Storesletten & Chris Telmer & Amir Yaron, 1997. "Consumption and risk sharing over the life cycle," GSIA Working Papers, Carnegie Mellon University, Tepper School of Business 228, Carnegie Mellon University, Tepper School of Business.
  14. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Imputing consumption in the PSID using food demand estimates from the CEX," IFS Working Papers, Institute for Fiscal Studies W04/27, Institute for Fiscal Studies.
  15. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 104(6), pages 1227-62, December.
  16. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," Review of Economic Studies, Oxford University Press, vol. 73(1), pages 163-193.
  17. Angus Deaton & Christina Paxson, 1993. "Intertemporal Choice and Inequality," NBER Working Papers 4328, National Bureau of Economic Research, Inc.
  18. Nelson, Julie A, 1994. "On Testing for Full Insurance Using Consumer Expenditure Survey Data: Comment," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(2), pages 384-94, April.
  19. Goldberger, Arthur S, 1972. "Maximum-Likelihood Estimation of Regressions Containing Unobservable Independent Variables," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 13(1), pages 1-15, February.
  20. David M. Cutler & Lawrence F. Katz, 1991. "Macroeconomic Performance and the Disadvantaged," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 22(2), pages 1-74.
  21. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2004. "Cyclical Dynamics in Idiosyncratic Labor Market Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 112(3), pages 695-717, June.
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  23. Javier Díaz-Giménez & Vincenzo Quadrini & José-Víctor Ríos-Rull, 1997. "Dimensions of inequality: facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-21.
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Citations

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Cited by:
  1. Fabrizio Perri & Dirk Krueger, 2009. "How does Household Consumption Respond to Income Shocks?," 2009 Meeting Papers, Society for Economic Dynamics 14, Society for Economic Dynamics.
  2. Giorgio E. Primiceri & Thijs van Rens, 2006. "Heterogeneous life-cycle profiles, income risk and consumption inequality," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 945, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2008.
  3. Telyukova, Irina, 2008. "Household Need for Liquidity and the Credit Card Debt Puzzle," University of California at San Diego, Economics Working Paper Series, Department of Economics, UC San Diego qt4c67r71r, Department of Economics, UC San Diego.
  4. Tommaso Ciarli & Andre' Lorentz & Maria Savona & Marco Valente, 2012. "The role of technology, organisation, and demand in growth and income distribution," LEM Papers Series, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy 2012/06, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  5. Fabrizio Perri & Dirk Krueger, 2008. "How does Household Consumption Respond to Income Shocks? Evidence and Theory," 2008 Meeting Papers 910, Society for Economic Dynamics.
  6. Laura Blow & Valérie Lechene & Peter Levell, 2014. "Using the CE to Model Household Demand," NBER Chapters, National Bureau of Economic Research, Inc, in: Improving the Measurement of Consumer Expenditures National Bureau of Economic Research, Inc.
  7. Pricila Maziero & Laurence Ales, 2008. "Accounting for private information," Working Papers, Federal Reserve Bank of Minneapolis 663, Federal Reserve Bank of Minneapolis.
  8. Kathleen W. Johnson & Geng Li, 2007. "Do high debt payments hinder household consumption smoothing?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2007-52, Board of Governors of the Federal Reserve System (U.S.).
  9. Tommaso Ciarli, 2012. "Structural interactions and long run growth: An application of Experimental Design to Agent Based Models," Papers on Economics and Evolution 2012-06, Philipps University Marburg, Department of Geography.
  10. Klein, Paul & Telyukova, Irina A., 2013. "Measuring high-frequency income risk from low-frequency data," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(3), pages 535-542.
  11. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2009. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States, 1967-2006," NBER Working Papers 15483, National Bureau of Economic Research, Inc.
  12. Islam, TM Tonmoy, 2013. "Childhood neighborhood conditions and the persistence of adult income," Regional Science and Urban Economics, Elsevier, Elsevier, vol. 43(4), pages 684-693.

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