Incomplete information and the time series behaviour of consumption

David Demery and Nigel W. Duck
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David Demery: Department of Economics, University of Bristol, 8 Woodland Road, Bristol, BS8 1TN, UK, Postal: Department of Economics, University of Bristol, 8 Woodland Road, Bristol, BS8 1TN, UK
Nigel W. Duck: Department of Economics, University of Bristol, 8 Woodland Road, Bristol, BS8 1TN, UK, Postal: Department of Economics, University of Bristol, 8 Woodland Road, Bristol, BS8 1TN, UK

Journal of Applied Econometrics, 2000, vol. 15, issue 4, 355-366

Abstract: Pischke (1995) uses both microeconomic and macroeconomic US data to test the idea that, within an otherwise standard PIH framework, ignorance by agents of aggregate labour income can account for the observed degree of excess smoothness and sensitivity in consumption. His tests involve only the second moments of aggregate consumption and labour income. In this paper our main aim is to identify and test the restrictions his model implies for aggregate consumption dynamics, using US quarterly data over the period 1959-1996, but our framework allows us also to test an earlier, related model of Goodfriend (1992). We find that both models can be formally rejected: ignorance of aggregate labour income cannot by itself account for aggregate consumption dynamics; some other relaxation of the assumptions of the standard PIH is required. We give an example of one possible such relaxation and present evidence indicating that Pischke's version of imperfect information may, within that framework, have a significant role to play. Copyright © 2000 John Wiley & Sons, Ltd.

Date: 2000
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