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Evaluating how predictable errors in expected income affect consumption

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  • Giamboni, Luigi
  • Millemaci, Emanuele
  • Waldmann, Robert

Abstract

This paper studies whether anomalies in consumption can be explained by a behavioral model in which agents make predictable errors in forecasting income. We use a micro-data set containing subjective expectations about future income. The paper shows that, the null hypothesis of rational expectations is rejected in favor of the behavioral 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 consumption.

Suggested Citation

  • Giamboni, Luigi & Millemaci, Emanuele & Waldmann, Robert, 2007. "Evaluating how predictable errors in expected income affect consumption," MPRA Paper 12939, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:12939
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    References listed on IDEAS

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    1. I am storing pdf's at google sites so you can see my research
      by Robert in Robert's Stochastic Thoughts on 2009-03-16 16:09:00

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    Cited by:

    1. Lena Dräger, 2016. "Are Consumers Planning Consumption According to an Euler Equation?," Working Papers 1621, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz.
    2. Sarah Brown & Mark N. Harris & Christopher Spencer & Karl Taylor, 2020. "Financial Expectations and Household Consumption: Does Middle Inflation Matter?," Working Papers 2020002, The University of Sheffield, Department of Economics.
    3. Annicchiarico, Barbara & Surricchio, Silvia & Waldmann, Robert J., 2019. "A behavioral model of the credit cycle," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 53-83.
    4. Emanuele Millemaci & Robert J. Waldmann, 2008. "Dynamically Inconsistent Preferences and Money Demand," CEIS Research Paper 129, Tor Vergata University, CEIS, revised 09 Sep 2008.
    5. Albert Solé-Ollé & Elisabet Viladecans-Marsal, 2011. "Local spending and the housing boom," Working Papers 2011/27, Institut d'Economia de Barcelona (IEB).
    6. Michele Limosani & Emanuele Millemaci, 2014. "Precautionary savings of agents with heterogeneous risk aversion," Applied Economics, Taylor & Francis Journals, vol. 46(20), pages 2342-2361, July.
    7. Emanuele Millemaci & Robert J. Waldmann, 2016. "Present-Biased Preferences and Money Demand," De Economist, Springer, vol. 164(2), pages 187-207, June.
    8. Albert Solé-Ollé & Elisabet Viladecans-Marsal, 2011. "Local spending and the housing boom," Working Papers 2011/27, Institut d'Economia de Barcelona (IEB).

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    More about this item

    Keywords

    Behavioral Economics; Subjective Expectations; Rational Expectations; Consumption and Saving;
    All these keywords.

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis

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