Testing Full Consumption Insurance in the Frequency Domain
AbstractFull consumption insurance implies that consumers are able to perfectly share risk by equalizing state by state their inter-temporal marginal rates of substitution in the presence of idiosyncratic endowment shocks. In this paper I test the implications of full consumption insurance using band spectrum regression methods. I argue that moving to the frequency domain provides a possible solution to many difficulties tied to tests of perfect risk sharing. In particular, it provides a unifying framework to test consumption smoothing, both over time and across states of nature. Full consumption insurance is soundly rejected at business cycle frequencies.
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Bibliographic InfoPaper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 874.
Length: 32 pages
Date of creation: 2008
Date of revision:
Consumption insurance ; Idiosyncratic risk ; Frequency domain;
Find related papers by JEL classification:
- D1 - Microeconomics - - Household Behavior
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-11-11 (All new papers)
- NEP-ECM-2008-11-11 (Econometrics)
- NEP-IAS-2008-11-11 (Insurance Economics)
- NEP-MAC-2008-11-11 (Macroeconomics)
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