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Evaluating how predictable errors in expected income affect consumption

  • Luigi Giamboni
  • Emanuele Millemaci
  • Robert J. Waldmann

This article studies whether anomalies in consumption can be explained by a behavioural model in which agents make predictable errors in forecasting income. We use a micro-data set containing subjective expectations about future income. This article shows that the null hypothesis of rational expectations is rejected in favour of the behavioural model, since consumption responds to predictable forecast errors. On average, agents who we predict are too pessimistic increase consumption after the predictable positive income shock. On average, agents who are too optimistic reduce the consumption.

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File URL: http://hdl.handle.net/10.1080/00036846.2012.745987
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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 45 (2013)
Issue (Month): 28 (October)
Pages: 4004-4021

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Handle: RePEc:taf:applec:v:45:y:2013:i:28:p:4004-4021
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  1. 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.
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  8. Dominitz, Jeff, 2001. "Estimation of income expectations models using expectations and realization data," Journal of Econometrics, Elsevier, vol. 102(2), pages 165-195, June.
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  10. Jeff Dominitz, 1998. "Earnings Expectations, Revisions, And Realizations," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 374-388, August.
  11. Marjorie A. Flavin, 1991. "The Joint Consumption/Asset Demand Decision: A Case Study in Robust Estimation," NBER Working Papers 3802, National Bureau of Economic Research, Inc.
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