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Looking for the News in the Noise. Additional Stochastic Implications of Optimal Consumption Choise

Laurence Kotlikoff () and Ariel Pakes ()

Annals of Economics and Statistics, 1988, issue 9, 29-46

Abstract: In neoclassical models of consumption choice under earnings uncertainty changes in consumption programs from one period to the next are determined by new information received about future earnings over the period. This proposition suggests that actual consumption choices imbed extractable information about the extent and time resolution of earnings uncertainty. The primary goal of this paper is to demonstrate how one can infer the extent of earnings uncertainty from information on consumption choices. We obtain a theoretical relationship between the revision in the present expected value of consumption (noise) and the revision in the expectation of lifetime earnings (news) that can be used to measure subjective earnings uncertainty.

Date: 1988
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Working Paper: Looking for the News in the Noise - Additional Stochastic Implications of Optimal Consumption Choice (1984) Downloads
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