Testing Full Consumption Insurance in the Frequency Domain
Paulo Santos Monteiro ()
The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics
Full consumption insurance implies that consumers are able to perfectly share risk by equalizing state by state their inter-temporal marginal rates of substitution in the presence of idiosyncratic endowment shocks. In this paper I test the implications of full consumption insurance using band spectrum regression methods. I argue that moving to the frequency domain provides a possible solution to many difficulties tied to tests of perfect risk sharing. In particular, it provides a unifying framework to test consumption smoothing, both over time and across states of nature. Full consumption insurance is soundly rejected at business cycle frequencies.
Keywords: Consumption insurance; Idiosyncratic risk; Frequency domain (search for similar items in EconPapers)
JEL-codes: D1 E21 (search for similar items in EconPapers)
Pages: 32 pages
New Economics Papers: this item is included in nep-ecm, nep-ias and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:874
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