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Superior Information, Income Shocks and the Permanent Income Hypothesis

Author

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  • Luigi Pistaferri

    (University College London, Istituto Universitario Navale, Napoli and CSEF, University of Salerno)

Abstract

According to the permanent income hypothesis with quadratic preferences, savings should react only to transitory income shocks, but not to permanent shocks. The problem is that income shock components are not separately observable. I show how the combination of income realizations with subjective expectations can help to identify separately the transitory and the permanent shock to income, thus providing a powerful test of the theory. The empirical analysis is performed on a sample of Italian households drawn from the 1989-1991 Survey of Household Income and Wealth.

Suggested Citation

  • Luigi Pistaferri, 1998. "Superior Information, Income Shocks and the Permanent Income Hypothesis," CSEF Working Papers 07, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:07
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    Keywords

    Subjective expectations; income shocks; permanent income hypothesis;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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