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Consumption And Income Smoothing

  • Francesco Busato
  • Bruno Chiarini

    ()

    (Department of Economic Studies, Parthenope University of Naples)

This paper presents a two sector dynamic general equilibrium model in which income smoothing takes place within the households (intra-temporally), and consumption smoothing takes place among the households (inter-temporally). Idiosyncratic risk sharing within the family is based on an income smoothing contract. There are two sectors in the model, the regular sector and the underground sector, and the smoothing comes from the underground sector, which is countercyclical with respect aggregate GDP. The paper shows that the simulated disaggregated consumption and income series (that are the regular and underground consumption flows) are more sensitive to exogenous changes in sector-specific productivity and tax rates than regular and underground income flows, and that this picture is reversed when the aggregate series are considered.

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Paper provided by D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy in its series Working Papers with number 2_2002.

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Length: 39 pages
Date of creation: Jan 2002
Date of revision:
Handle: RePEc:prt:wpaper:2_2002
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  12. Fiorito, Riccardo & Kollintzas, Tryphon, 1994. "Stylized facts of business cycles in the G7 from a real business cycles perspective," European Economic Review, Elsevier, vol. 38(2), pages 235-269, February.
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  16. Rajnish Mehra, 2006. "Recursive Competitive Equilibrium," NBER Working Papers 12433, National Bureau of Economic Research, Inc.
  17. Lawrence J. Christiano, 1987. "Why is consumption less volatile than income?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-20.
  18. 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.
  19. Andrew B. Abel & Laurence J. Kotlikoff, 1988. "Does the Consumption of Different Age Groups Move Together? A New Nonparametric Test of Intergenerational Altruism," NBER Working Papers 2490, National Bureau of Economic Research, Inc.
  20. 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.
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  22. Bruno Chiarini & Paolo Piselli, 2000. "Aggregate Fluctuations In A Unionized Labor Market," Working Papers 2_2000, D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy.
  23. Fumio Hayashi, 1989. "Is Japan's saving rate high?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-9.
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  25. Jappelli, Tullio & Pagano, Marco, 1988. "Consumption and Capital Market Imperfection: An International Comparison," CEPR Discussion Papers 244, C.E.P.R. Discussion Papers.
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