Testing full consumption insurance in the frequency domain
Santos-Monteiro, Paulo (2008) Testing full consumption insurance in the frequency domain. Working Paper. University of Warwick, Department of Economics, Coventry.
WRAP_Monteiro_twerp_874.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
Full consumption insurance implies that consumers are able to perfectly share risk by equalizing state by state their inter-temporal marginal rates of substitution in the presence of idiosyncratic endowment shocks. In this paper I test the implications of full consumption insurance using band spectrum regression methods. I argue that moving to the frequency domain provides a possible solution to many difficulties tied to tests of perfect risk sharing. In particular, it provides a unifying framework to test consumption smoothing, both over time and across states of nature. Full consumption insurance is soundly rejected at business cycle frequencies.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Consumption (Economics), Home economics, Risk assessment, Regression analysis -- Mathematical models|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||Coventry|
|Date:||24 October 2008|
|Number of Pages:||32|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Fundação para a Ciência e a Tecnologia (FCT)|
|References:|| J. G. Altonji and A. Siow, Testing the response of consumption to income changes with (noisy) panel data, The Quarterly Journal of Economics, 102 (1987), pp. 293–328.  S. Altug and R. A. Miller, Household choices in equilibrium, Econometrica, 58 (1990), pp. 543–70.  O. Attanasio and S. J. Davis, Relative wage movements and the distribu- tion of consumption, Journal of Political Economy, 104 (1996), pp. 1227–62.  O. P. Attanasio and G. Weber, Is consumption growth consistent with intertemporal optimization? evidence from the consumer expenditure survey, Journal of Political Economy, 103 (1995), pp. 1121–57.  M. Baxter and R. G. King, Measuring business cycles: Approximate band- pass filters for economic time series, The Review of Economics and Statistics, 81 (1999), pp. 575–593.  J. Berkowitz, Generalized spectral estimation of the consumption-based as- set pricing model, Journal of Econometrics, 104 (2001), pp. 269–288.  B. S. Bernanke, Permanent income, liquidity, and expenditure on auto- mobiles: Evidence from panel data, The Quarterly Journal of Economics, 99 (1984), pp. 587–614.  R. Blundell and I. Preston, Consumption inequality and income uncer- tainty, The Quarterly Journal of Economics, 113 (1998), pp. 603–640.  R. W. Blundell, L. Pistaferri, and I. Preston, Consumption inequal- ity and partial insurance, American Economic Review, (forthcoming 2008).  L. J. Christiano and R. J. Vigfusson, Maximum likelihood in the fre- quency domain: the importance of time-to-plan, Journal of Monetary Economics, 50 (2003), pp. 789–815.  J. H. Cochrane, A simple test of consumption insurance, Journal of Political Economy, 99 (1991), pp. 957–76.  D. Corbae, S. Ouliaris, and P. C. B. Phillips, A reexamination of the consumption function using frequency domain regressions, Empirical Economics, 19 (1994), pp. 595–609.  D. M. Cutler and L. F. Katz, Rising inequality? changes in the distribu- tion of income and consumption in the 1980’s, American Economic Review, 82 (1992), pp. 546–51.  A. Deaton and C. Paxson, Intertemporal choice and inequality, Journal of Political Economy, 102 (1994), pp. 437–67.  S. Dynarski and J. Gruber, Can families smooth variable earnings?, Brookings Papers on Economic Activity, (1997), pp. 229–84.  R. F. Engle, Band spectrum regression, International Economic Review, 15 (1974), pp. 1–11.  , Testing price equations for stability across spectral frequency bands, Econometrica, 46 (1978), pp. 869–81.  R. F. Engle and D. K. Foley, An asset price model of aggregate invest- ment, International Economic Review, 16 (1975), pp. 625–47.  R. F. Engle and R. Gardner, Some finite sample properties of spectral estimators of a linear regression, Econometrica, 44 (1976), pp. 149–65.  F. Guvenen, Do stockholders share risk more effectively than nonstockhold- ers?, The Review of Economics and Statistics, 89 (2007), pp. 275–288.  R. E. Hall, Stochastic implications of the life cycle-permanent income hy- pothesis: Theory and evidence, Journal of Political Economy, 86 (1978), pp. 971–87.  R. E. Hall and F. S. Mishkin, The sensitivity of consumption to transitory income: Estimates from panel data on households, Econometrica, 50 (1982), pp. 461–81.  A. C. Harvey, Linear regression in the frequency domain, International Economic Review, 19 (1978), pp. 507–12.  F. Hayashi, J. Altonji, and L. Kotlikoff, Risk-sharing between and within families, Econometrica, 64 (1996), pp. 261–94.  D. Krueger and F. Perri, Does income inequality lead to consumption inequality? evidence and theory, Review of Economic Studies, 73 (2006), pp. 163–193.  B. J. Mace, Full insurance in the presence of aggregate uncertainty, Journal of Political Economy, 99 (1991), pp. 928–56.  J. A. Nelson, On testing for full insurance using consumer expenditure sur- vey data: Comment, Journal of Political Economy, 102 (1994), pp. 384–94.  A. Pagan, Econometric issues in the analysis of regressions with generated regressors, International Economic Review, 25 (1984), pp. 221–47.  K. Storesletten, C. I. Telmer, and A. Yaron, How important are idiosyncratic shocks? evidence from labor supply, American Economic Review, 91 (2001), pp. 413–417.  R. M. Townsend, Risk and insurance in village india, Econometrica, 62 (1994), pp. 539–91.|
Actions (login required)