Some evidence on the influence of income uncertainty on aggregate consumption

Recent theory suggests uncertainty in income influences consumption expenditures. With disposable income modeled as a random walk plus drift, an econometric technique for estimating the moments of a dependent variable is used to test this hypothesis by producing a series of consistent estimates of the variance of disposable income. Using quarterly post-World War II data and a well-known specification of the consumption function, the standard deviation of income has a negative and statistically significant influence on consumption. The influence of the standard deviation of income on consumption is of the same order of magnitude as that of contemporaneous wealth on consumption.     

Estimating Euler equations

In this paper we consider conditions under which the estimation of a log-linearized Euler equation for consumption yields consistent estimates of the preference parameters. When utility is isoelastic and a sample covering a long time period is available, consistent estimates are obtained from the log-linearized Euler equation when the innovations to the conditional variance of consumption growth are uncorrelated with the instruments typically used in estimation. We perform a Monte Carlo experiment, consisting in solving and simulating a simple life cycle model under uncertainty, and show that in most situations, the estimates obtained from the log-linearized equation are not systematically biased. This is true even when we introduce heteroskedasticity in the process generating income. The only exception is when discount rates are very high (e.g. 47% per year). This problem arises because consumers are nearly always close to the maximum borrowing limit: the estimation bias is unrelated to the linearization and estimates using non-linear GMM are as bad. Across all our situations, estimation using a log-linearized Euler equation does better than nonlinear GMM. Finally, we plot life cycle profiles for the variance of consumption growth, which, except when the discount factor is very high, is remarkably flat. This implies that claims that demographic variables in log-linearized Euler equations capture changes in the variance of consumption growth are unwarranted.     

ESTIMATING TEMPTATION AND COMMITMENT OVER THE LIFE CYCLE

This article estimates the importance of temptation for consumption smoothing and asset accumulation in a life‐cycle model. We use two complementary estimation strategies: first, we estimate the model‐implied Euler equation; second, we match liquid and illiquid wealth accumulation using the method of simulated moments. In both cases, we find that the utility cost of temptation is one‐quarter of the utility benefit of consumption. Further, temptation is crucial for correctly estimating the elasticity of intertemporal substitution (EIS): EIS estimates are biased downward when ignoring temptation. Finally, the model only matches the share of illiquid wealth if temptation is in the preference specification.     

The inflation and inflation uncertainty relationship for Turkey: a dynamic framework

This article assesses the interaction between inflation and inflation uncertainty in a dynamic framework for Turkey by using monthly data for the time period 1984–2009. The bulk of previous studies investigating the link between inflation and inflation uncertainty employ Autoregressive Conditional Heteroskedasticity (ARCH)-type models, which consider inflation uncertainty as a predetermined function of innovations to inflation specification. The stochastic volatility in mean (SVM) models that we use allow for gathering innovations to inflation uncertainty and assess the effect of inflation volatility shocks on inflation over time. When we assess the interaction between inflation and its volatility, the empirical findings indicate that response of inflation to inflation volatility is positive and statistically significant. However, the response of inflation volatility to inflation is negative but not statistically significant.     

DETERMINATION OF PARTICIPATION DECISION, HIRING DECISION, AND WAGES IN A DOUBLE SELECTION FRAMEWORK: MALE-FEMALE WAGE DIFFERENTIALS IN THE U.S. LABOR MARKET REVISITED

The magnitude of the male-female wage differential is known to be highly sensitive to the specification of the wage equations used. An important source of misspecification is the failure to correct the sample selection bias that results from estimating the wage equation obtained through two sequential decisions: the worker's decision to participate in the labor market and the employer's decision to hire. Estimation of the wage equation ignoring this double selection process leads to biased estimates, and consequently the resulting male-female wage differentials are likely to be misleading. Following a double selection approach and using a sample from the National Longitudinal Survey of Youth, this article examines the determinants of not only the wage equation but also the worker's participation and the employer's hiring decisions in both male and female samples. The study further demonstrates that the unexplained male-female wage differential remains underestimated when the roles of both selection decisions are ignored in the estimation of wage equations.     

流动性约束和不确定性状态下的预防性储蓄研究-中国城乡居民的消费特征分析

该文利用我国城乡时间序列数据,对城乡居民的消费特征做了新的探索.我们对引入预期收入增长的对数线性欧拉方程和二阶泰勒近似的欧拉方程进行了估计,结果说明,当期收入仍是决定我国居民消费的主要因素,消费的随机游走假说不成立;城镇居民比农村居民有更强的预防性储蓄动机.1990年代中期以来持续走低的收入增长率直接抑制了消费需求的增长,而仍然偏紧的流动性约束和日益增强的不确定性增大了预防性储蓄动机.     

The Regional Demand for Petrol in Australia*

The regional demand for petrol in Australia is estimated using quarterly data on a State basis for the period from the September quarter 1958 through the June quarter 1981. A dynamic demand model is postulated and estimates obtained using an iterative Zellner procedure. The results suggest that per capita petrol demand is not income elastic as reported in other studies, and support the hypothesis that demand is price inelastic. In addition, the States exhibit statistically significant differential responses to price and income shocks. This implies that the specification of a single national demand function may be misleading.     

Revisiting the Olympic Effect

By utilizing the log‐linear gravity model, other authors have found statistically robust, permanent and large effects of hosting mega‐events (e.g. Olympics) on international exports. Surprisingly, they found that the unsuccessful bidders to host the Olympics experienced a similar impact on exports. Utilizing alternate specification such as the Poisson pseudo‐maximum likelihood (PPML) estimation that allows for heteroskedasticity prevalent in trade data, the this paper fails to find a robust positive effect of hosting and bidding for a mega‐event on total aggregate exports. Under heteroskedasticity, the parameters of log‐linearized models estimated by ordinary least squares (OLS) lead to biased estimates of the true elasticities.     

Prudent consumers: New evidence from the Consumer Expenditure Survey

Using Consumer Expenditure Survey data from 1986 to recent years, this study examines whether or not the precautionary saving motive is an important force governing consumer behavior. A time series model is obtained by aggregating a log-linearized Euler equation across households, in which the cross-sectional variance of consumption growth represents income uncertainty. The test uses an alternative measure of consumption that excludes some problematic expenditure items from the conventional measure and finds strong evidence for the presence of the precautionary motive. This result is in sharp contrast with the findings of previous cross-sectional estimations using the same data set. It is argued that cross-sectional estimations may be seriously affected by measurement errors whereas the current estimation is not.     

Short-run exchange rate uncertainty in Latin America

This paper to obtain an ex ante measure of exchange rate uncertainty in 11 Latin American countries. As a preliminary issue, the purchasing power parity (PPP) condition is tested using Engle and Granger two-step procedure and Johansen method. The argument is that exchange rate uncertainty could be lower if PPP holds in the long run. The expected exchange rate uncertainty is estimated according to an extended version of the autoregressive, conditionally heteroscedastic (ARCH) model. The results show that the ARCH adjusment produces more efficient estimates in seven countries and that the acceptance of PPP has little effect on exchange rate uncertainty.     

Uncertain Pension Income and Household Saving

This paper investigates the relationship between household saving and pensions, and estimates both the displacement effect of pensions on private saving and the precautionary saving effect due to uncertainty in pension income. I estimate the savings equation implied by a simple life‐cycle model featuring income uncertainty using survey data for Dutch households, with subjective expectations on pension benefits and uncertainty. Exploiting exogenous variation due to pension fund performance, I find that households save significantly more due to uncertainty in pension income. Not controlling for uncertainty biases the estimated displacement effect of pensions on private savings towards zero.     

CHINA'S NATIONAL INCOME: A SURVEY OF ESTIMATES

A number of official and Western estimates of China's national income for the period since 1949 are at present available. The official estimates are based on the Marxian production concept while the Western estimates are, in the main, based on the comprehensive production concept. The periods covered by the estimates vary; and even in cases where the periods covered are the same, the estimates vary in magnitude and, in most cases, in the implied rate of economic growth. Apart from differences arising from the different national income concepts and definitions employed in individual estimates, sources of discrepancies between series of estimates can be traced to the particular sets of primary data employed and also to the particular procedures followed in estimating the national income components. The present paper brings together the various estimates available to date and indicates for each, as far as possible, the basic production concept adopted, the particular national income aggregates estimated, the basic estimation approach employed, and the special procedures used for estimating some of the components of national income. Comparisons of the major series of estimates for the period 1952–1959 are made and the sources of discrepancies between the series are discussed. Finally, some problems are described which a researcher in the West has to contend with in working on China's national income accounting.     

The supply of consumption goods in centrally planned economies

Estimates are given, based on annual time series from the mid-1950s to 1975, of planner's supply functions for consumption goods in Czechoslovakia, the GDR, Hungary, and Poland. The supply function is specified in the form of a behavioral rule describing the planners' short-run adjustment of consumption away from its long-run trend. The fits are good, and the estimates support the a priori specification and the maintained hypothesis of stable resource-allocation behavior. These supply functions, together with household demand functions estimated in a separate paper, will provide a starting point for disequilibrium estimation of the consumption-goods market for these economies.     

An empirical comparison of nonparametric and parametric Engel functions

Nonparametric techniques are used to estimate income densities, Engel functions and their derivatives, and income elasticities. Nonparametric kernel methods give less ambiguous estimates of the densities than discrete, maximum penalised likelihood estimation. The nonparametric estimates of the Engel functions, their derivatives, and the income elasticities are compared with some corresponding parametric estimates. The nonparametrically estimated Engel functions provide a better fit to the data. Also, the nonparametric elasticity estimates are qualitatively similar to the parametric estimates. Some statistically significant differences are observed between the parametric versus nonparametric estimates, but not to the extent of having any major policy implications.     

Relative prices and the demand for money

This paper examines the validity of the conventional specification of money demand with particular reference to the issue of relative prices. It is shown that the conventional money demand function is based on the assumption of weak separability of money from commodities, which forms the basis for the absence of relative prices in money demand. Empirical and presumptive evidence suggests that weak separability is not tenable, implying that relative prices are important in money demand. The inclusion of commodity prices in money demand significantly affects the interest and income elasticity estimates. Finally, it is noted that the aggregate consumption function excluding commodity prices also has no theoretical and empirical base.     

Individual needs and social pressure: Evidence on the Easterlin hypothesis using repeated cross-section surveys of Canadian households

This paper provides additional evidence, using time-series and cross-sectional Canadian survey data, for the Easterlin hypothesis of an important income elasticity of individual needs. Our analysis is based on the regression of a minimum income to satisfy needs equation derived from a simple utility maximization framework. Moreover, our specification allows computing the Arrow-Pratt relative risk-aversion index and the Intertemporal Rate of Substitution. Our results are robust to different estimation methods dealing with the endogenous nature of income. We also compute poverty rates using our estimated equation parameters and standard OECD measures of poverty and find that some subjective measures are relatively close to the OECD measures.     

The myth of post-reform income stagnation: Evidence from Brazil and Mexico

Economic policies are often judged by a handful of statistics, some of which may be biased during periods of change. We estimate the income growth implied by the evolution of food demand and durable good ownership in post-reform Brazil and Mexico, and find that changes in consumption patterns are inconsistent with official estimates of near stagnant incomes. That is attributed to biases in the price deflator. The estimated unmeasured income gains are higher for poorer households, implying marked reductions in “real” inequality. These findings challenge the conventional wisdom that post-reform income growth was low and did not benefit the poor.     

Private consumption,public consumption and liquidity constraints in developing countries: some empirical evidence

This paper extends the empirical work of Giovannini (1983, 1985) in seeking to identify the elasticity of substitution in consumption in developing countries using the Euler equation approach. Allowing for liquidity constraints in capital markets which force a percentage of aggregate consumption growth to track income growth to track income growth, we report static and time-varying estimates of this percentage and the elasticity of intertemporal substitution, as well as estimates of substitution between private and public consumption and implied utility function parameters. Our results suggest that liquidity constraints are a pervasive feature of developing country consumption data and that the elasticity of intertemporal substitution is near-zero for the majority of countries considered.     

Intertemporal consumption with directly measured welfare functions and subjective expectations

Euler equation estimation of intertemporal consumption models requires many, often unverifiable assumptions. These include assumptions on expectations and preferences. We aim at reducing some of these requirements by using direct subjective information on respondents’ preferences and expectations. The results suggest that individually measured welfare functions and expectations have predictive power for the variation in consumption across households. Furthermore, estimates of the intertemporal elasticity of substitution based on the estimated welfare functions are plausible and of a similar order of magnitude as other estimates found in the literature. The model favored by the data only requires cross-section data for estimation.     

Estimating Savings and Growth Functions in Developing Economies: A Simultaneous Equations Approach

There is a two-way influence between the savings rate on the one hand and some of its determinants on the other (i.e. a problem of simultaneity exists). This study specifies a general production function to generate a growth rate function, and estimates savings and growth equations simultaneously. A Hausman specification test examines the correct system specification, and determines whether 2SLS or 3SLS is the appropriate estimation technique. The results show that a simultaneous equations model is a better estimation technique (2SLS or 3SLS) than a single equation system (OLS), and that the full-information method (3SLS) provides better estimates than a limited-information method (2SLS). [C30]