Evaluating how predictable errors in expected income affect consumption
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.
Volume (Year): 45 (2013)
Issue (Month): 28 (October)
|Contact details of provider:|| Web page: http://www.tandfonline.com/RAEC20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/RAEC20|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
- Jeff Dominitz, 1998. "Earnings Expectations, Revisions, And Realizations," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 374-388, August.
- Zeldes, Stephen P, 1989.
"Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence,"
The Quarterly Journal of Economics,
MIT Press, vol. 104(2), pages 275-98, May.
- Stephen Zeldes, . "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," Rodney L. White Center for Financial Research Working Papers 20-86, Wharton School Rodney L. White Center for Financial Research.
- Martin Browning & Annamaria Lusardi, 1996.
"Household Saving: Micro Theories and Micro Facts,"
96-01, University of Copenhagen. Department of Economics.
- Jeff Dominitz & Charles F. Manski, 1994.
"Using Expectations Data to Study Subjective Income Expectations,"
- J. Dominitz & C. F. Manski, . "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.
- Jeff Dominitz & Charles F. Manski, 1994. "Using Expectations Data to Study Subjective Income Expectations," NBER Working Papers 4937, National Bureau of Economic Research, Inc.
- 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.
- Robert E. Hall & Frederic S. Mishkin, 1980.
"The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households,"
NBER Working Papers
0505, National Bureau of Economic Research, Inc.
- Hall, Robert E & Mishkin, Frederic S, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," Econometrica, Econometric Society, vol. 50(2), pages 461-81, March.
- 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.
- Sydney Ludvigson & Christina H. Paxson, 1997. "Approximation bias in linearized Euler equations," Research Paper 9712, Federal Reserve Bank of New York.
- Sydney Ludvigson & Christina H. Paxson, 1999. "Approximation Bias in Linearized Euler Equations," NBER Technical Working Papers 0236, National Bureau of Economic Research, Inc.
- Dominitz, Jeff, 2001. "Estimation of income expectations models using expectations and realization data," Journal of Econometrics, Elsevier, vol. 102(2), pages 165-195, June.
- 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.
- Marjorie Flavin, 1999. "Robust Estimation of the Joint Consumption / Asset Demand Decision," NBER Working Papers 7011, National Bureau of Economic Research, Inc.
- repec:dgr:kubcen:199738 is not listed on IDEAS
- Luigi Pistaferri & Tullio Jappelli, 1998.
"Using Subjective Income Expectations to Test for Excess Sensitivity of Consumption to Predicted Income Growth,"
CSEF Working Papers
12, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- 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.
- Jappelli, Tullio & Pistaferri, Luigi, 1997. "Using Subjective Income Expectations to Test for Excess Sensitivity of Consumption to Predicted Income Growth," CEPR Discussion Papers 1617, C.E.P.R. Discussion Papers.
- 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.
When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:45:y:2013:i:28:p:4004-4021. 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: (Michael McNulty)
If references are entirely missing, you can add them using this form.