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Individual Income, Incomplete Information, and Aggregate Consumption

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  • Pischke, Jorn-Steffen

Abstract

Models of life-cycle consumption are studied in which individuals react optimally to their own income process but have incomplete or no information on economywide variables. Since individual income is less persistent than aggregate income, consumers will react too little to aggregate income variation generating excess smoothness. Since aggregate information is slowly incorporated into consumption, aggregate consumption is correlated with lagged income. Model predictions using estimated income processes qualitatively correspond to empirical findings for aggregate consumption but differ in magnitude. Individual income processes are estimated from the Survey of Income and Program Participation, making various adjustments for measurement error. Copyright 1995 by The Econometric Society.

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  • Pischke, Jorn-Steffen, 1995. "Individual Income, Incomplete Information, and Aggregate Consumption," Econometrica, Econometric Society, vol. 63(4), pages 805-840, July.
    • Handle: RePEc:ecm:emetrp:v:63:y:1995:i:4:p:805-40
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    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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