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Consumption, income dynamics and precautionary savings

Pistaferri, Luigi; (1999) Consumption, income dynamics and precautionary savings. Doctoral thesis (Ph.D), UCL (University College London). Green open access

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Abstract

I study the dynamics of household consumption and income. My thesis consists of four papers, detailed as follows. In the first paper, I test for precautionary savings and excess sensitivity of consumption using a panel of Italian households that has measures of income expectations. The latter provide a powerful instrument for predicting income growth. The empirical analysis allows for a fairly general specification for the stochastic structure of the forecast error. I find that consumption growth is positively correlated with the expected variance of income and uncorrelated with predicted income growth. In the second paper, I test for the saving for a rainy day hypothesis using the same set of subjective income expectations described above. According to the permanent income hypothesis, household savings should only react to transitory income shocks, as permanent shocks are entirely consumed. I show how subjective expectations can help to identify separately the transitory and the permanent shocks to income, thus providing a powerful test of the theory. In the third paper, I notice that the theory of full consumption insurance implies absence of consumption mobility between any time periods. This implication requires knowledge of the evolution of the entire consumption distribution. I test this unexplored prediction of the theory using a panel of Italian households. I design a non-parametric test and find substantial mobility of consumption even controlling for possible preference shifts and measurement error. The findings strongly reject the theory of full consumption insurance. In the final paper I model the conditional variance of income shocks, that is, the appropriate measure of risk emphasised by the theory. I first discriminate amongst various models of earnings determination that separate income shocks into idiosyncratic transitory and permanent components. I allow for education specific differences in the stochastic process for earnings. The empirical analysis is conducted using data drawn from the 1967-1991 Panel Study of Income Dynamics.

Type: Thesis (Doctoral)
Qualification: Ph.D
Title: Consumption, income dynamics and precautionary savings
Open access status: An open access version is available from UCL Discovery
Language: English
Additional information: Thesis digitised by ProQuest.
Keywords: Social sciences; Health and environmental sciences; Household income
URI: https://discovery.ucl.ac.uk/id/eprint/10099670
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