Sufficient Statistics for Measuring Forward-Looking Welfare

David Baqaee, Ariel Burstein and Yasutaka Koike-Mori

No 32567, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a dynamic money-metric index of household welfare. Our approach hinges on two assumptions: (i) preferences are separable between the present and the future; and (ii) some households face no undiversifiable idiosyncratic risk. For this group, we infer the value of the future from consumption-saving behavior, translating future shocks into current-dollar equivalents. Others’ welfare is then pinned down by matching their budget shares. The method accommodates incomplete markets, lifecycle motives, non-rational expectations, and non-exponential discounting without specifying functional forms. Implementation needs only price series, repeated cross-sectional income-balance-sheet-spending data, and an estimate of the intertemporal-substitution elasticity. In simulations, our method tracks true welfare better than net-present-value calculations, especially under credit constraints. In the PSID, our dynamic index differs sharply from static measures. Our estimates can be used to study the dynamic welfare effect of different shocks, without enumerating and forecasting all the uncertain margins and time horizons along which the shock can have effects.

JEL-codes: C14 D0 D10 D11 E0 E01 E20 I3 J6 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-lab and nep-upt
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