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Measuring consumption smoothing in CEX data

Klein, Paul and Gervais, Martin (2010) Measuring consumption smoothing in CEX data Journal of Monetary Economics, 57, (8), pp. 988-999. (doi:10.1016/j.jmoneco.2010.08.009).

Record type: Article

Abstract

A new method of measuring the degree of consumption smoothing is proposed and implemented using data from the Consumer Expenditure Survey. The structure of this Survey is such that estimators previously used in the literature are inconsistent, simply because income is measured annually and consumption is measured quarterly. An AR(1) structure is imposed on the income process to obtain a proxy for quarterly income through a projection on annual income. By construction, this proxy gives rise to a measurement error which is orthogonal to the proxy itself—as opposed to the unobserved regressor—leading to a consistent estimator. Our estimates are contrasted with the output of two estimators used in the literature. This comparison shows that while the first (OLS) estimator tends to overstate the degree of risk sharing, the second (IV) estimator grossly understates it.

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Published date: November 2010
Organisations: Economics

Identifiers

Local EPrints ID: 174019
URI: http://eprints.soton.ac.uk/id/eprint/174019
ISSN: 0304-3932
PURE UUID: 50613a94-bdbe-4a48-8fd6-5ed80db3cff8

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Date deposited: 10 Feb 2011 11:28
Last modified: 18 Jul 2017 12:12

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Contributors

Author: Paul Klein
Author: Martin Gervais

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