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The aggregation of dynamic relationships caused by incomplete information

  • Thornton, Michael A.

We consider the aggregation of heterogeneous dynamic equations across a large population, as introduced by Granger (1980), where the dynamics arise because agents face a signal extraction problem caused by incomplete information. This weakens the independence assumptions used previously in the aggregation literature. We show that, under plausible assumptions, the differenced cross-section aggregate shows long term persistence even though every individual micro-series follows a random walk. As an example, estimates of the model’s micro-relations are made using US household panel data.

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Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 178 (2014)
Issue (Month): P2 ()
Pages: 342-351

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Handle: RePEc:eee:econom:v:178:y:2014:i:p2:p:342-351
Contact details of provider: Web page: http://www.elsevier.com/locate/jeconom

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  2. L A Gil-Alana & Peter M. Robinson, 2000. "Testing of seasonal fractional integration in UK and Japanese consumption and income," LSE Research Online Documents on Economics 2051, London School of Economics and Political Science, LSE Library.
  3. Pischke, Jörn-Steffen, 1991. "Individual income, incomplete information, and aggregate consumption," ZEW Discussion Papers 91-07, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
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  17. Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
  18. Karen E. Dynan, 2000. "Habit Formation in Consumer Preferences: Evidence from Panel Data," American Economic Review, American Economic Association, vol. 90(3), pages 391-406, June.
  19. Lawrance, Emily C, 1991. "Poverty and the Rate of Time Preference: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 99(1), pages 54-77, February.
  20. L. A. Gil-Alaña & Peter M. Robinson, 2001. "Testing of seasonal fractional integration in UK and Japanese consumption and income," LSE Research Online Documents on Economics 298, London School of Economics and Political Science, LSE Library.
  21. Marcus J. Chambers, . "Long Memory and Aggregation in Macroeconomic Time Series," Economics Discussion Papers 437, University of Essex, Department of Economics.
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