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Evidence on excess sensitivity of consumption to predictable income growth

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  • Limosani, Michele
  • Millemaci, Emanuele

Abstract

This paper tests for excess sensitivity of consumption to predicted income growth using a behavioral model that allows for myopia and/or irrationality. We use a micro-dataset containing subjective expectations about future income and subjective indicators of the families' financial condition that make us possible to evaluate the response to income changes of agents with liquidity constraint problems. We do not find significant evidence of excess sensitivity of consumption to income, as well as in the case in which we take into account liquidity constraints. Moreover, we find that agent's systematic errors are statistically significant in explaining consumption changes for all specifications considered.

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  • Limosani, Michele & Millemaci, Emanuele, 2011. "Evidence on excess sensitivity of consumption to predictable income growth," Research in Economics, Elsevier, vol. 65(2), pages 71-77, June.
    • Handle: RePEc:eee:reecon:v:65:y:2011:i:2:p:71-77
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    Cited by:

    1. Michele Limosani & Emanuele Millemaci, 2014. "Precautionary savings of agents with heterogeneous risk aversion," Applied Economics, Taylor & Francis Journals, vol. 46(20), pages 2342-2361, July.
    2. Tomas Havranek & Anna Sokolova, 2016. "Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 130 Studies Say "Probably Not"," Working Papers 2016/08, Czech National Bank.
    3. Terézia Vančová, 2019. "The Excess Smoothness and Sensitivity of Consumption in the V4 Countries," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 67(6), pages 1653-1663.
    4. Tomas Havranek & Anna Sokolova, 2020. "Do Consumers Really Follow a Rule of Thumb? Three Thousand Estimates from 144 Studies Say 'Probably Not'," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 35, pages 97-122, January.

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