IDEAS home Printed from https://ideas.repec.org/a/eee/eecrev/v44y2000i2p337-358.html
   My bibliography  Save this article

Using subjective income expectations to test for excess sensitivity of consumption to predicted income growth

Author

Listed:
  • Jappelli, Tullio
  • Pistaferri, Luigi

Abstract

We test for excess sensitivity of consumption to predicted income growth using a 1989–93 panel survey of Italian households that includes measures of subjective income and inflation expectations. These expectations provide a powerful instrument for predicting income growth. Controlling for the expected variance of consumption growth and for predictable changes in labour supply, we find that household consumption growth is very strongly correlated with predicted earnings growth of the head. We also find considerable evidence that excess sensitivity is due to liquidity constraints. Our strongest result is that in a sample of low-asset households the coefficient of expected income increases is one, while that of expected income declines is zero.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Jappelli, Tullio & Pistaferri, Luigi, 2000. "Using subjective income expectations to test for excess sensitivity of consumption to predicted income growth," European Economic Review, Elsevier, vol. 44(2), pages 337-358, February.
  • Handle: RePEc:eee:eecrev:v:44:y:2000:i:2:p:337-358
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0014-2921(98)00069-5
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Garcia, Rene & Lusardi, Annamaria & Ng, Serena, 1997. "Excess Sensitivity and Asymmetries in Consumption: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 154-176, May.
    2. Shea, John, 1995. "Union Contracts and the Life-Cycle/Permanent-Income Hypothesis," American Economic Review, American Economic Association, vol. 85(1), pages 186-200, March.
    3. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
    4. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-346, April.
    5. Das, Marcel & van Soest, Arthur, 1997. "Expected and realized income changes: Evidence from the Dutch socio-economic panel," Journal of Economic Behavior & Organization, Elsevier, vol. 32(1), pages 137-154, January.
    6. 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.
    7. Attanasio, Orazio P & Weber, Guglielmo, 1995. "Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1121-1157, December.
    8. Sydney Ludvigson & Christina H. Paxson, 2001. "Approximation Bias In Linearized Euler Equations," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 242-256, May.
    9. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1991. "Why is Italy's Savings Rate So High?," CEPR Discussion Papers 572, C.E.P.R. Discussion Papers.
    10. 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 1151-1181, September.
    11. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1992. "Earnings uncertainty and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 30(2), pages 307-337, November.
    12. Joseph G. Altonji & Aloysius Siow, 1987. "Testing the Response of Consumption to Income Changes with (Noisy) Panel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 293-328.
    13. Christopher D. Carroll, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 1-55.
    14. Fumio Hayashi, 1985. "The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data," The Quarterly Journal of Economics, Oxford University Press, vol. 100(4), pages 1083-1113.
    15. repec:tiu:tiutis:bdbe10dd-649c-4521-ab28-7aa051a5bf82 is not listed on IDEAS
    16. 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.
    17. J. Dominitz & C. F. Manski, "undated". "Using expectations data to study subjective income expectations," Institute for Research on Poverty Discussion Papers 1050-94, University of Wisconsin Institute for Research on Poverty.
    18. 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.).
    19. 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.
    20. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-1113, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Orazio P. Attanasio, 1998. "Consumption Demand," NBER Working Papers 6466, National Bureau of Economic Research, Inc.
    2. Filer, Larry & Fisher, Jonathan D., 2007. "Do liquidity constraints generate excess sensitivity in consumption? New evidence from a sample of post-bankruptcy households," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 790-805, December.
    3. Parker, J.A., 1997. "The Reaction of Household Consumption to Predictable Changes in Payroll Tax Rates," Working papers 9724, Wisconsin Madison - Social Systems.
    4. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
    5. Ni, Shawn & Seol, Youn, 2014. "New evidence on excess sensitivity of household consumption," Journal of Monetary Economics, Elsevier, vol. 63(C), pages 80-94.
    6. George-Marios Angeletos, 2001. "The Hyberbolic Consumption Model: Calibration, Simulation, and Empirical Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 47-68, Summer.
    7. Daria Pignalosa, 2019. "On the role of the utility function in the estimation of preference parameters," Metroeconomica, Wiley Blackwell, vol. 70(4), pages 793-820, November.
    8. Tomas Havranek & Anna Sokolova, 2016. "Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say "Probably Not"," Working Papers 2016/08, Czech National Bank.
    9. Lee, Jeong-Joon & Sawada, Yasuyuki, 2010. "Precautionary saving under liquidity constraints: Evidence from rural Pakistan," Journal of Development Economics, Elsevier, vol. 91(1), pages 77-86, January.
    10. Shawn Ni, 2007. "Excess Sensitivity in Consumption without Liquidity Constraint: Evidence from Monthly Household Panel Data," Working Papers 0714, Department of Economics, University of Missouri.
    11. Kim, Seewon, 2013. "Prudent consumers: New evidence from the Consumer Expenditure Survey," Economic Modelling, Elsevier, vol. 33(C), pages 77-85.
    12. Enrichetta Ravina, 2005. "Keeping Up with the Joneses: Evidence from Micro Data," 2005 Meeting Papers 557, Society for Economic Dynamics.
    13. Manuela Deidda, 2014. "Precautionary saving under liquidity constraints: evidence from Italy," Empirical Economics, Springer, vol. 46(1), pages 329-360, February.
    14. Erik Hurst & Arthur Kennickell & Annamaria Lusardi & Francisco Torralba, 2005. "Precautionary Savings and the Importance of Business Owners," NBER Working Papers 11731, National Bureau of Economic Research, Inc.
    15. Andrea Repetto, 2001. "Incentivos al ahorro personal: Lecciones de la economía del comportamiento," Central Banking, Analysis, and Economic Policies Book Series, in: Felipe Morandé & Rodrigo Vergara & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Edit (ed.),Análisis Empírico del Ahorro en Chile, edition 1, volume 1, chapter 7, pages 191-240, Central Bank of Chile.
    16. Engen, Eric M. & Gruber, Jonathan, 2001. "Unemployment insurance and precautionary saving," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 545-579, June.
    17. Ziliak, James P., 1998. "Does the choice of consumption measure matter? An application to the permanent-income hypothesis," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 201-216, February.
    18. Julian Thimme, 2017. "Intertemporal Substitution In Consumption: A Literature Review," Journal of Economic Surveys, Wiley Blackwell, vol. 31(1), pages 226-257, February.
    19. Yasuyuki Sawada & Kazumitsu Nawata & Masako Ii & Mark J. Lee, 2011. "Did the Financial Crisis in Japan Affect Household Welfare Seriously?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(2‐3), pages 297-324, March.
    20. Chou, Shin-Yi & Liu, Jin-Tan & Hammitt, James K., 2003. "National Health Insurance and precautionary saving: evidence from Taiwan," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 1873-1894, September.

    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:eecrev:v:44:y:2000:i:2:p:337-358. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: http://www.elsevier.com/locate/eer .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/eer .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.