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

  • Jappelli, Tullio
  • Pistaferri, Luigi

We test for precautionary saving and excess sensitivity of consumption to predicted income growth using a 1989-93 panel survey of Italian households that has measures of subjective income and inflation expectations. These expectations provide a powerful instrument for predicting income growth. The empirical specification controls for predictable changes in labor supply and allows a fairly general specification for the stochastic structure of the forecast error. We find that consumption growth is positively correlated with the expected variance of income and uncorrelated with predicted income growth. Overall, the results support the precautionary saving model

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 44 (2000)
Issue (Month): 2 (February)
Pages: 337-358

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Handle: RePEc:eee:eecrev:v:44:y:2000:i:2:p:337-358
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  1. Garcia, R. & Lusardi, A. & Ng, S., 1995. "Excess Sensitivity and Asymmetries in Consumption: An Empirical Investigation," Cahiers de recherche 9511, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  17. Dynan, Karen E, 1993. "How Prudent Are Consumers?," Journal of Political Economy, University of Chicago Press, vol. 101(6), pages 1104-13, December.
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  20. 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 1151-81, September.
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