Advance Information and Consumption Insurance: Evidence and Structural Estimation

Marcelo Pedroni, Christian Stoltenberg () and Swapnil Singh
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Christian Stoltenberg: University of Amsterdam and Tinbergen Institute
Swapnil Singh: Bank of Lithuania, Kaunas University of Technology

No 108, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: We show that advance information on future income can be identified from the correlation between consumption growth and future income growth conditional on current income growth. Employing PSID data, we find that this conditional correlation is positive and significant. We use this evidence to structurally estimate a standard incomplete markets model and discover that US households possess enough advance information to reduce their income forecast errors by 15%. This significantly affects the measurement of consumption insurance. With advance information, 25% more income shocks pass through to consumption on average, and more than twice as much for the 5% asset poorest.

Keywords: income risk; advance information; consumption insurance; panel data; incomplete markets. (search for similar items in EconPapers)
JEL-codes: C23 D12 D31 D52 D81 E21 G52 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2022-12-21
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