The Insensitivity of Consumption to News About Income
NBER Working Paper No. 2252 (Also Reprint No. r1040)
This paper uses a variance bounds test to see whether consumption is too sensitive to news about income to be consistent with a standard permanent income model, under the maintained hypothesis that income has a unit root. It is found that, if anything, consumption is less sensitive than the model would predict. This implication is robust to the representative consumer having private information about his future income that the econometrician does not have, to wealth shocks, and to transitory consumption. This suggests the importance in future research on the model of allowing for factors that tend to make consumption smooth.
Document Object Identifier (DOI): 10.3386/w2252
Published: West, Kenneth D. "The Insensitivity of Consumption to News About Income." Journal of Monetary Economics, Vol. 21, (1988), pp. 17-33. citation courtesy of