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Intertemporal Choice and Consumption Mobility

Author

Listed:
  • Tullio Jappelli

    (University of Salerno CSEF, and CEPR.)

  • Luigi Pistaferri

    (Stanford University, CEPR, and SIEPR.)

Abstract

The theory of intertemporal consumption choice makes sharp predictions about the evolution of the entire distribution of household consumption, not just about its conditional mean. In the paper, we study the empirical transition matrix of consumption using a panel drawn from the Bank of Italy Survey of Household Income and Wealth. We estimate the parameters that minimize the distance between the empirical and the theoretical transition matrix of the consumption distribution. The transition matrix generated by our estimates matches remarkably well the empirical matrix, both in the aggregate and in samples stratified by education. Our estimates strongly reject the consumption insurance model and suggest that households smooth income shocks to a lesser extent than implied by the permanent income hypothesis. (JEL: D52, D91, I30) Copyright (c) 2006 by the European Economic Association.

Suggested Citation

  • Tullio Jappelli & Luigi Pistaferri, 2006. "Intertemporal Choice and Consumption Mobility," Journal of the European Economic Association, MIT Press, vol. 4(1), pages 75-115, March.
    • Handle: RePEc:tpr:jeurec:v:4:y:2006:i:1:p:75-115
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    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General

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