Superior Information, Income Shocks, and the Permanent Income Hypothesis

Luigi Pistaferri

131 citations0/0 files storedThe Review of Economics and Statistics

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Financial Literacy, Pension, Retirement Analysis Monetary Policy and Economic Impact Income, Poverty, and Inequality

Abstract

According to the permanent income hypothesis with quadratic preferences, savings should react only to transitory income shocks, but not to permanent shocks. The problem is that income shock components are not separately observable. I show how the combination of income realizations with subjective expectations can help to identify separately the transitory and the permanent shock to income, thus providing a powerful test of the theory. The empirical analysis is performed on a sample of Italian households drawn from the 1989-1991 Survey of Household Income and Wealth.

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References

1990Precautionary Saving in the Small and in the Large 1991Saving and Liquidity Constraints 1992Understanding Consumption 1981The Adjustment of Consumption to Changing Expectations About Future Income 1960Optimal Properties of Exponentially Weighted Forecasts 1984Chapter 22 Panel data 1982The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households 1995Household Saving: Micro Theories and Micro Facts

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