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Imputing consumption in the PSID using food demand estimates from the CEX

Author

Listed:
  • Richard Blundell

    (Institute for Fiscal Studies and University College London)

  • Luigi Pistaferri

    (Institute for Fiscal Studies and Stanford University)

  • Ian Preston

    (Institute for Fiscal Studies and University College London)

Abstract

This paper assesses the accuracy of decomposing income risk into permanent and transitory components using income and consumption data. We develop a specific approximation to the optimal consumption growth rule and use Monte Carlo evidence to show that this approximation can provide a robust method for decomposing income risk. The availability of asset data enables the use of a more accurate approximation allowing for partial sef-insurance against permanent shocks. We show that the use of data on median asset holdings corrects much of the error in the simple approximation which assumes no self-insurance against permanent shocks.

Suggested Citation

  • Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Imputing consumption in the PSID using food demand estimates from the CEX," IFS Working Papers W04/27, Institute for Fiscal Studies.
    • Handle: RePEc:ifs:ifsewp:04/27
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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