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Full Information Estimation of Household Income Risk and Consumption Insurance

Arpita Chatterjee (), James Morley () and Aarti Singh ()
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Aarti Singh: University of Sydney

No 2017-07, Discussion Papers from School of Economics, The University of New South Wales

Abstract: We develop a panel unobserved components model of household income and consumption that can be estimated using full information methods. Maximum likelihood estimates for a simple version of this model suggests similar income risk, but higher consumption insurance relative to the partial information moments-based estimates in Blundell, Pistaferri, and Preston (2008) for the same panel dataset. Bayesian model comparison supports this simple version of the model that only allows a spillover from permanent income to permanent consumption, but assumes no cointegration and no persistence in transitory components. However, consumption insurance and income risk estimates are highly robust across different specifications.

Keywords: panel unobserved components; Bayesian model comparison; permanent income; household consumption behavior (search for similar items in EconPapers)
JEL-codes: E32 E22 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ltv and nep-mac
Date: 2017-03
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