Please use this identifier to cite or link to this item: http://arks.princeton.edu/ark:/88435/dsp011831cj95m

 Title: Individual Income, Incomplete Information and Aggregate Consumption Authors: Pischke, Jorn-Steffen Keywords: consumptionEuler equationsinformation structure Issue Date: 1-Aug-1991 Citation: Econometrica , Vol. 63, No. 4, July, 1995 Series/Report no.: Working Papers (Princeton University. Industrial Relations Section) ; 289 Abstract: Individual income is much more variable than aggregate per capita income. I argue that aggregate information is therefore not very important for individual consumption decisions and construct a model of life-cycle consumption in which individuals react optimally to their own income process but ignore economy wide information. Since individual income is less persistent than aggregate income consumers will react too little to aggregate income variation. Aggregate consumption will be excessively smooth. Since aggregate information is slowly incorporated into consumption, aggregate consumption will be autocorrelated and correlated with lagged income. On the other hand, the model has the same prediction for micro data as the standard permanent income model. I argue that this is roughly in accord with the ﬁndings in the literature. The second part of the paper provides empirical evidence on individual and aggregate income processes and calibrates the model using the estimated parameters. The model predictions roughly correspond to the empirical ﬁndings for aggregate consumption. Allowing for the existence of measurement error in micro income, durables, ﬁnite lifetimes of consumers, and advance information improves the predictions of the model. These features introduce relatively small changes as compared to the impact of incomplete information. URI: http://arks.princeton.edu/ark:/88435/dsp011831cj95m Related resource: http://links.jstor.org/sici?sici=0012-9682%28199507%2963%3A4%3C805%3AIIIIAA%3E2.0.CO%3B2-1 Appears in Collections: IRS Working Papers

Files in This Item:

File Description SizeFormat