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Measuring consumption smoothing in CEX data

Measuring consumption smoothing in CEX data
Measuring consumption smoothing in CEX data
This paper proposes and implements a new method of measuring the degree of consumption smoothing 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. We impose an AR(1) structure 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. We contrast our estimates with the output of two estimators used in the literature. We show that while the first (OLS) estimator tends to overstate the degree of risk sharing, the second (IV) estimator grossly understates it

risk sharing, consumption smoothing, income risk, projection
0966-4246
Gervais, Martin
c03b188f-08e2-42a6-abca-b64b362a4065
Klein, Paul
feea4bea-ca95-41ce-b72c-92b7d05247b1
Gervais, Martin
c03b188f-08e2-42a6-abca-b64b362a4065
Klein, Paul
feea4bea-ca95-41ce-b72c-92b7d05247b1

Gervais, Martin and Klein, Paul (2009) Measuring consumption smoothing in CEX data. Discussion Papers in Economics and Econometrics No 0916, (906).

Record type: Article

Abstract

This paper proposes and implements a new method of measuring the degree of consumption smoothing 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. We impose an AR(1) structure 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. We contrast our estimates with the output of two estimators used in the literature. We show 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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More information

e-pub ahead of print date: 2009
Keywords: risk sharing, consumption smoothing, income risk, projection

Identifiers

Local EPrints ID: 71044
URI: http://eprints.soton.ac.uk/id/eprint/71044
ISSN: 0966-4246
PURE UUID: 9f2ee1fd-3e44-459e-9869-f3adcb8a4fd8

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Date deposited: 13 Jan 2010
Last modified: 13 Mar 2024 20:17

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Contributors

Author: Martin Gervais
Author: Paul Klein

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