Under-Sensitivity and Under-Volatility in Aggregate Consumption Expenditures
This paper derives and tests exact restrictions on the sensitivity of changes in consumption to univariate innovations in labor income. Under the maintained hypothesis that labor income is difference stationary, changes in consumption are shown to be far too insensitive to innovations in labor income to be consistent with the Permanent Income Hypothesis. The under-sensitivity result complements recent work on the under-volatility of consumption. Several potential explanations for under-sensitivity are examined (for example, costly adjustment, unanticipated capital gains) but none is found to be entirely satisfactory.
||Under-Sensitivity and Under-Volatility in Aggregate Consumption Expenditures
Journal of Macroeconomics (1991)
v. 13, iss. 1, pp. 1-24
||Cushing, Matthew J
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|Cushing, Matthew J||Economics