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Incomplete information and the time series behaviour of consumption

  • David Demery

    (Department of Economics, University of Bristol, 8 Woodland Road, Bristol, BS8 1TN, UK)

  • Nigel W. Duck

    (Department of Economics, University of Bristol, 8 Woodland Road, Bristol, BS8 1TN, UK)

Registered author(s):

    Pischke (1995) uses both microeconomic and macroeconomic US data to test the idea that, within an otherwise standard PIH framework, ignorance by agents of aggregate labour income can account for the observed degree of excess smoothness and sensitivity in consumption. His tests involve only the second moments of aggregate consumption and labour income. In this paper our main aim is to identify and test the restrictions his model implies for aggregate consumption dynamics, using US quarterly data over the period 1959-1996, but our framework allows us also to test an earlier, related model of Goodfriend (1992). We find that both models can be formally rejected: ignorance of aggregate labour income cannot by itself account for aggregate consumption dynamics; some other relaxation of the assumptions of the standard PIH is required. We give an example of one possible such relaxation and present evidence indicating that Pischke's version of imperfect information may, within that framework, have a significant role to play. Copyright © 2000 John Wiley & Sons, Ltd.

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    Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

    Volume (Year): 15 (2000)
    Issue (Month): 4 ()
    Pages: 355-366

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    Handle: RePEc:jae:japmet:v:15:y:2000:i:4:p:355-366
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    1. Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
    2. John H. Cochrane, 1988. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," NBER Working Papers 2730, National Bureau of Economic Research, Inc.
    3. John Y. Campbell & N. Gregory Mankiw, 1989. "Consumption, Income and Interest Rates: Reinterpreting the Time Series Evidence," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 185-246 National Bureau of Economic Research, Inc.
    4. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
    5. Attfield, C. L. F. & Demery, D. & Duck, N. W., 1992. "Partial adjustment and the permanent income hypothesis," European Economic Review, Elsevier, vol. 36(6), pages 1205-1222, August.
    6. Fumio Hayashi, 1984. "The Permanent Income Hypothesis and Consumption Durability: Analysis Based on Japanese Panel Data," NBER Working Papers 1305, National Bureau of Economic Research, Inc.
    7. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
    8. Campbell, John & Deaton, Angus, 1989. "Why Is Consumption So Smooth?," Scholarly Articles 3221494, Harvard University Department of Economics.
    9. Lawrence J. Christiano & Martin Eichenbaum & David Marshall, 1990. "The permanent income hypothesis revisited," Staff Report 129, Federal Reserve Bank of Minneapolis.
    10. John Y. Campbell & N. Gregory Mankiw, 1991. "Permanent Income, Current Income, and Consumption," NBER Working Papers 2436, National Bureau of Economic Research, Inc.
    11. Altonji, Joseph G & Siow, Aloysius, 1987. "Testing the Response of Consumption to Income Changes with (Noisy) Panel Data," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 293-328, May.
    12. Pishke, J.S., 1992. "Individual Income, Incomplete Information and Aggregate Consumption," Papers 9238, Tilburg - Center for Economic Research.
    13. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
    14. Hayashi, Fumio & Sims, Christopher A, 1983. "Nearly Efficient Estimation of Time Series Models with Predetermined, but Not Exogenous, Instruments," Econometrica, Econometric Society, vol. 51(3), pages 783-98, May.
    15. Goodfriend, Marvin, 1992. "Information-Aggregation Bias," American Economic Review, American Economic Association, vol. 82(3), pages 508-19, June.
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