Superior Information, Income Shocks and the Permanent Income Hypothesis

Luigi Pistaferri

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: According to the permanent income hypothesis with quadratic preferences, savings should react only to transitory income shocks, but not to permanent shocks. The problem is that income shock components are not separately observable. I show how the combination of income realizations with subjective expectations can help to identify separately the transitory and the permanent shock to income, thus providing a powerful test of the theory. The empirical analysis is performed on a sample of Italian households drawn from the 1989-1991 Survey of Household Income and Wealth.

Keywords: Subjective expectations; income shocks; permanent income hypothesis (search for similar items in EconPapers)
JEL-codes: D84 D91 E21 (search for similar items in EconPapers)
Date: 1998-09-01
New Economics Papers: this item is included in nep-dge and nep-mic
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Citations: View citations in EconPapers (5)

Published in Review of Economics and Statistics, 2001, vol. 83, pages 465-476

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Journal Article: Superior Information, Income Shocks, And The Permanent Income Hypothesis (2001)
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