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Measuring consumption smoothing in CEX data

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  • Gervais, Martin
  • Klein, Paul

Abstract

A new method of measuring the degree of consumption smoothing is proposed and implemented using data from the Consumer Expenditure Survey. The structure of this Survey is such that estimators previously used in the literature are inconsistent, simply because income is measured annually and consumption is measured quarterly. An AR(1) structure is imposed on the income process to obtain a proxy for quarterly income through a projection on annual income. By construction, this proxy gives rise to a measurement error which is orthogonal to the proxy itself--as opposed to the unobserved regressor--leading to a consistent estimator. Our estimates are contrasted with the output of two estimators used in the literature. This comparison shows that while the first (OLS) estimator tends to overstate the degree of risk sharing, the second (IV) estimator grossly understates it.

Suggested Citation

  • Gervais, Martin & Klein, Paul, 2010. "Measuring consumption smoothing in CEX data," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 988-999, November.
  • Handle: RePEc:eee:moneco:v:57:y:2010:i:8:p:988-999
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    Cited by:

    1. Laura Blow & Valérie Lechene & Peter Levell, 2014. "Using the CE to Model Household Demand," NBER Chapters,in: Improving the Measurement of Consumer Expenditures, pages 141-178 National Bureau of Economic Research, Inc.
    2. Campos, Rodolfo G. & Reggio, Iliana, 2015. "Consumption in the shadow of unemployment," European Economic Review, Elsevier, vol. 78(C), pages 39-54.
    3. Tobias Broer & Marek Kapicka & Paul Klein, 2017. "Consumption Risk Sharing with Private Information and Limited Enforcement," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 170-190, January.
    4. Lepage-Saucier, Nicolas, 2016. "The consumption response to temporary layoffs and hours losses," Labour Economics, Elsevier, vol. 41(C), pages 177-193.
    5. Tommaso Ciarli & Marco Valente, 2016. "The Complex Interactions between Economic Growth and Market Concentration in a Model of Structural Change," SPRU Working Paper Series 2016-06, SPRU - Science and Technology Policy Research, University of Sussex.
    6. Ciarli, Tommaso & Valente, Marco, 2016. "The complex interactions between economic growth and market concentration in a model of structural change," Structural Change and Economic Dynamics, Elsevier, vol. 38(C), pages 38-54.
    7. Klein, Paul & Telyukova, Irina A., 2013. "Measuring high-frequency income risk from low-frequency data," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 535-542.
    8. Asdrubali, Pierfederico & Tedeschi, Simone & Ventura, Luigi, 2015. "Household Risksharing Channels," MPRA Paper 65906, University Library of Munich, Germany.
    9. Tobias Broer & Marek Kapicka & Paul Klein, 2017. "Consumption Risk Sharing with Private Information and Limited Enforcement," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 170-190, January.
    10. Islam, TM Tonmoy, 2013. "Childhood neighborhood conditions and the persistence of adult income," Regional Science and Urban Economics, Elsevier, vol. 43(4), pages 684-693.
    11. Michio Suzuki, 2016. "Understanding The Costs Of Consumer Durable Adjustments," Economic Inquiry, Western Economic Association International, vol. 54(3), pages 1561-1573, July.

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