The Insensitivity of Consumption to News About Income
This paper uses a variance bounds test to see whether consumption is too sensitive to news about income to be consistent with a standard permanent income model, under the maintained hypothesis that income has a unit root. It is found that, if anything, consumption is less sensitive than the model would predict. This implication is robust to the representative consumer having private information about his future income that the econometrician does not have, to wealth shocks, and to transitory consumption. This suggests the importance in future research on the model of allowing for factors that tend to make consumption smooth.
|Date of creation:||May 1987|
|Date of revision:|
|Publication status:||published as West, Kenneth D. "The Insensitivity of Consumption to News About Income." Journal of Monetary Economics, Vol. 21, (1988), pp. 17-33.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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