Using Subjective Income Expectations to Test for Excess Sensitivity of Consumption to Predicted Income Growth

Luigi Pistaferri and Tullio Jappelli ()

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

Abstract: We test for precautionary saving and excess sensitivity of consumption to predicted income growth using a 1989-93 panel survey of Italian households that has measures of subjective income and inflation expectations. These expectations provide a powerful instrument for predicting income growth. The empirical specification controls for predictable changes in labor supply and allows a fairly general specification for the stochastic structure of the forecast error. We find that consumption growth is positively correlated with the expected variance of income and uncorrelated with predicted income growth. Overall, the results support the precautionary saving model

Keywords: Subjective expectations; precautionary saving; excess sensitivity (search for similar items in EconPapers)
JEL-codes: E21 (search for similar items in EconPapers)
Date: 1998-12-01
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (3)

Published in European Economic Review, February 2000, vol. 44, pages 337-358

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Related works:
Journal Article: Using subjective income expectations to test for excess sensitivity of consumption to predicted income growth (2000)
Working Paper: Using Subjective Income Expectations to Test for Excess Sensitivity of Consumption to Predicted Income Growth (1997)
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