Are Consumers Forward-Looking?
Are consumers forward-looking? According to the certainty-equivalence version of the life cycle/permanent income hypothesis, consumption is a function of the expected present value of income. Using longitudinal data from the PSID, I invert this function and compare the realized present value of income to consumption. Consumption proves to be a very poor predictor of future income, despite future income being predictable by past income. Under rational expectations, information known to the consumer should not enter the regression of present value on consumption. However, as an empirical matter lagged income does enter. The conclusion is that consumers act "as if" they are not forward-looking. Available data being imperfect much of the paper is devoted to robustness tests, none of which change the basic conclusion.
|Date of creation:||Jun 2007|
|Contact details of provider:|| Postal: Box 353330, Seattle, WA 98193-3330|
Web page: http://www.econ.washington.edu/
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:udb:wpaper:uwec-2007-22. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael Goldblatt)
If references are entirely missing, you can add them using this form.