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Individual Income, Incomplete Information, and Aggregate Consumption

  • Pischke, Jorn-Steffen

Models of life-cycle consumption are studied in which individuals react optimally to their own income process but have incomplete or no information on economywide variables. Since individual income is less persistent than aggregate income, consumers will react too little to aggregate income variation generating excess smoothness. Since aggregate information is slowly incorporated into consumption, aggregate consumption is correlated with lagged income. Model predictions using estimated income processes qualitatively correspond to empirical findings for aggregate consumption but differ in magnitude. Individual income processes are estimated from the Survey of Income and Program Participation, making various adjustments for measurement error. Copyright 1995 by The Econometric Society.

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 63 (1995)
Issue (Month): 4 (July)
Pages: 805-40

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Handle: RePEc:ecm:emetrp:v:63:y:1995:i:4:p:805-40
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  1. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
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  12. Alan S. Blinder & Angus Deaton, 1985. "The Time Series Consumption Function Revisited," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 465-521.
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