Looking for the News in the Noise - Additional Stochastic Implications of Optimal Consumption Choice
In neoclassical models of consumption choice under earnings uncertainty changes in consumption programs from one period to the next are determined by new information received about future earnings over the period. This proposition suggests testing the neoclassical model by ascertaining whether new earnings information explains consumption choice through time. It also suggests that actual consumption choices imbed extractable information about the extent and time resolution of earnings uncertainty. This paper derives a fairly general theoretical relationship between properly defined innnovations in consumption (noise) and revisions in expectations of lifetime earnings (news). It also clarifies the relationship between testing for the theoretical determinants of consumption and standard Euler tests that focus on theoretical nondeterminants of consumption. The chief prediction of the paper's theoretical results, that noise exactly equals news, is tested using aggregate time series data on consumption and earnings. We find that new earnings information explains only a very small fraction of the variance of aggregate consumption innovations. On the other hand, the extent of suboptimal consumption choice appears to be of little economic significance.
|Date of creation:||Nov 1984|
|Date of revision:|
|Publication status:||published as "Looking for the News in the Noise. Additional Stochastic Implications of Optimal Consumption Choice." From Annales D'Economie et de Statistique, Vol. 9, pp. 29-46, (1988).|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
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.:
- 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.
- Benjamin Eden & Ariel Pakes, 1981.
"On Measuring the Variance-Age Profile of Lifetime Earnings,"
UCLA Economics Working Papers
196, UCLA Department of Economics.
- Benjamin Eden & Ariél Pakes, 1981. "On Measuring the Variance-Age Profile of Lifetime Earnings," Review of Economic Studies, Oxford University Press, vol. 48(3), pages 385-394.
- Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
- N. Gregory Mankiw & Julio J. Rotemberg & Lawrence H. Summers, 1985.
"Intertemporal Substitution in Macroeconomics,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 100(1), pages 225-251.
- Sargent, Thomas J, 1978.
"Rational Expectations, Econometric Exogeneity, and Consumption,"
Journal of Political Economy,
University of Chicago Press, vol. 86(4), pages 673-700, August.
- Thomas J. Sargent, 1977. "Rational expectations, econometric exogeneity and consumption," Staff Report 25, Federal Reserve Bank of Minneapolis.
- 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.
- Mervyn A. King, 1983. "The Economics of Saving," NBER Working Papers 1247, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:1492. See general information about how to correct material in RePEc.
If references are entirely missing, you can add them using this form.