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Individual income, incomplete information, and aggregate consumption

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  • Pischke, Jörn-Steffen

Abstract

In this paper I study 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. The second part of the paper provides empirical evidence on individual and aggregate income processes and calibrates the model using the estimated parameters. The mode predictions roughly correspond to the empirical findings for aggregate consumption data. Allowing for the existence of measurement error in micro income, durables, finite lifetimes of consumers, and advance information improves the predictions of the model.

Suggested Citation

  • Pischke, Jörn-Steffen, 1991. "Individual income, incomplete information, and aggregate consumption," ZEW Discussion Papers 91-07, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:9107
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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