Examining the stochastic behavior of REIT returns: Evidence from the regime switching approach

In this paper the stochastic behavior of the returns on real estate investment trusts (REITs) is examined by using the unobserved component Markov switching (UC-MS) model. This approach endogenously permits the volatility to switch as the date and regime change and allows us to decompose the permanent and transitory components in REIT returns at monthly frequencies. The empirical evidence clearly shows that, for all of the REIT returns, the overall variance of the transitory component is significantly smaller than the corresponding variance for the permanent component. The durations of the high-variance regimes for both the fundamental and transitory components are short-lived and revert to normal levels quickly.     

The role of education and household composition for transitory and permanent income inequality–evidence from PSID data

Transitory and permanent shocks to income have been shown to be important determinants of household consumption. This paper shows that there are significant differences in the trends of transitory and permanent income inequality between demographic groups since the 1980s. Using data from the Panel Study of Income Dynamics, educational attainment and the composition of a household are found to play a key role. While permanent inequality increases steadily for educated households, it is flat over large parts of the sample period for the less educated households. Transitory inequality increases for all households headed by couples whereas it is constant for single households. Altogether, permanent shocks account for a larger part of the income variance of educated households whereas transitory shocks are relatively more important for the less educated. These results are able to shed light on the transmission of changes in income inequality to consumption inequality.     

Consumption dynamics under information processing constraints

This paper studies how “rational inattention” (RI)—a type of information processing constraint proposed by Sims [Sims, C.A., 2003. Implications of rational inattention, Journal of Monetary Economics 50 (3), 665–690]—affects the joint dynamics of consumption and income in a permanent income model with general income processes. Specifically, I propose an analytical approach to solve the multivariate permanent income model with RI and examine its implications for optimal consumption, saving, and welfare. It is shown that RI can affect the relative volatility of consumption and provide an endogenous propagation mechanism that disentangles the short-run and long-run responses of consumption to exogenous income shocks. I also explore how aggregation reduces the impact of the RI-induced endogenous noise on consumption and thus increases the smoothness of aggregate consumption. Finally, I compare RI with four alternative hypotheses (habit formation, signal extraction, robustness, and inattentiveness) by examining their implications for the joint behavior of consumption and income.     

Regional consumption dynamics and risk sharing in Italy

In this paper, we propose a new method for investigating consumption insurance. Differently from the existing literature, we use error correcting VAR models in order to capture simultaneously the occurrence of risk sharing against permanent and transitory shocks. The proposed method is applied to the case of Italian regions. Empirical results obtained over the 1960–2001 period reveal that contrary to previous findings, Italian regions seem to shield against permanent shocks other than transitory ones. Although some biases are detected in the allocation process of resources, deviations from full consumption insurance are not as relevant as claimed in the previous literature on the Italian regions.     

From income to consumption: measuring households partial insurance

This article computes the degree of consumption insurance with respect to transitory and permanent income shocks. The lack of income–consumption data in the US surveys forces researchers to use an empirical strategy to impute consumption. This procedure is avoided by using the Spanish Household Budget Continuous Survey, which contains true panel data on consumption and income information in the same survey. We find full insurance for transitory income shocks and partial insurance for permanent shocks for some sub-groups. For the full sample, a 10% permanent income shock induces a 4.8% permanent change in consumption, with higher insurance capacity for college, home-owner and high-wealth households. We also compute the role of durables and family income transfers as smoothing devices. The comparison of insurance level when based on true consumption data versus imputed consumption data shows that the use of imputed consumption underestimates permanent insurance.     

The permanent income hypothesis in underdeveloped economies:: Additional evidence

Laumas and Laumas find no support for the permanent income hypothesis in recent work on a consumption function for India. However, permanent income has been used not only in consumption but also in demand for money functions. Estimates of demand for money in 10 Asian LDCs indicate that substitution of permanent for current income is warranted. In particular, the estimate for India is improved substantially by the use of permanent instead of current income. Furthermore, the weights obtained from a polynomial lag distribution are almost identical to the Laumas' exponential weights with which they construct permanent income.     

Testing the permanent-income hypothesis: new evidence from West-German states (Länder)

This paper investigates whether time-series data from 11 West-German states (L?nder) provide evidence in accord with the implication of the permanent-income hypothesis (PIH) for the stochastic relationship between consumption and income innovations. The empirical results do not support this hypothesis, in the sense that the response of consumption to income innovations is found to be much weaker than is predicted by the PIH. Moreover, for each individual state as well as for Germany as a whole, the response was found to be asymmetric, being stronger for negative than positive income innovations. This evidence of asymmetry is consistent with a model in which consumers are liquidity constrained.

The permanent income hypothesis in an underdeveloped economy

After a concise but critical survey of several tests of the permanent income hypothesis (PIH), the authors advance their own test for India using annual data from 1919–1960. It employs Friedman's technique for calculating the permanent value of a variable. Two different specifications of the model are tested, using different values of the consumer's ‘horizon.’ In almost all cases it is found that the marginal propensity to consume out of transitory income is very similar to the marginal propensity to consume out of permanent income. The authors conclude that even a looser variant of the PIH is not valid for India. However, no valid generalization with respect to the appropriate planning horizon can be made, for the PIH was almost equally invalid with a horizon of one, two and two-and-a-half years. The authors briefly discuss the policy implications of their results for the savings efforts in underdeveloped countries.     

A multivariate innovations state space Beveridge–Nelson decomposition

The Beveridge–Nelson vector innovations structural time series framework is a new formulation that decomposes a set of variables into their permanent and transitory components. The proposed framework is flexible, modelling inter-series relationships and common features in a simple manner. In particular, it is shown that this new specification is simpler than conventional state space and cointegration approaches. The approach is illustrated using a trivariate data set comprising the GDP of Australia, the USA and the UK.     

Intra- and international risk-sharing in the short run and the long run

We investigate empirically how industrialized countries and US states share consumption risk at horizons between 1 and 30 years. US federal states share about 50% of their permanent idiosyncratic risk through cross-state capital income flows. While insurance against transitory fluctuations in output is virtually complete, OECD countries do not share any of their permanent idiosyncratic risk. Our results suggest that purely transaction cost based theories cannot explain the home bias, since the potential welfare gains from insurance against permanent shocks would by far outweigh that of insuring against transitory variation. We conclude that permanent and transitory shocks constitute two qualitatively different kinds of risk and that various forms of endogenous market incompleteness may render permanent shocks a lot harder to insure, in particular at the international level.     

A reexamination of the consumption function using frequency domain regressions

This paper reexamines the permanent income hypothesis (PIH) in the frequency domain. In contrast to some time domain tests, our frequency domain approach provides an explicit and natural test ofboth the permanentand transitory implications of the PIH for jointly nonstationary consumption and income data. Using a simple theoretical model, we demonstrate that the PIH implies the marginal propensity to consume (MPC) out of zero frequency income is unity. The PIHalso implies that the theoretical MPC out of transitory (or high frequency) income is smaller than the long-run MPC. These theoretical restrictions are natural implications of Friedman's hypothesis that agents consume out of permanent or low frequency income and (dis)save out of transitory or high frequency income. We test this full set of restrictions directly using spectral regression techniques. Under our set of assumptions, the derived disposable income process is shown to have a unit root and to be cointegrated with consumption. We therefore employ a systems spectral regression procedure that accommodates stochastic trends in the consumption and income series as well as the joint dependence in these series. In view of the relatively recent development of these systems spectral estimators, we also conduct Monte Carlo simulations across both low and high frequencies to assess properties of the estimator relative to established single equation techniques. New empirical estimates of the consumption function and tests of the PIH based on systems spectral regression methods are reported for U.S. aggregate consumption and income data over the period 1948–1993. The empirical results provide some evidence for the theoretical implications of the PIH.     

Inequality and volatility moderation in Russia: Evidence from micro-level panel data on consumption and income

We construct key household and individual economic variables using a panel micro data set from the Russia Longitudinal Monitoring Survey (RLMS) for 1994–2005. We analyze cross-sectional income and consumption inequality trends and find that inequality decreased during the 2000–2005 economic recovery. The decrease appears to be driven by falling volatility of transitory income shocks. The response of consumption to permanent and transitory income shocks becomes weaker later in the sample, consistent with greater self-insurance against permanent shocks and greater smoothing of transitory shocks. Finally, expenditure and income inequality in Russia are not far apart.     

The Intertemporal Substitution Hypothesis: A Quantitative Reassessment

This paper reexamines the empirical validity of the intertemporal substitution hypothesis by reinterpreting existing empirical labor supply studies. A dynamic labor supply model is proposed and is used as a unifying framework for various studies. Evidence discernible from those reinterpretations supports the view that a typical worker increases working hours in response to a wage increase perceived to be transitory, but decreases working hours in response to a permanent wage increase. Specifically, the evidence strongly suggests that the short run labor supply elasticity exceeds 1. [824]     

Earnings dynamics of men and women in Finland: permanent inequality versus earnings instability

I decompose the earnings variance of Finnish male and female workers into its permanent and transitory components using the approach of Baker (J Labor Econ,15:338–375, 1997) and Haider (J Labor Econ, 19:799–836, 2001) in the spirit of scientific replication. I find that the increasing earnings inequality of men and women is driven by both the transitory and permanent components of earnings. In addition, I find considerable differences in the earnings dynamics of men and women, that have been largely neglected in previous studies of earnings dynamics. The inequality among men is dominated by the permanent component. Conversely, permanent and transitory components are of comparable magnitudes to women. As a corollary, men experience more stable income paths but display larger permanent earnings differences. Women, on the other hand, face more unstable earnings profiles but show smaller permanent differences in earnings.     

持久收入假说与我国城镇居民消费——基于省级面板数据的实证分析

运用基于持久收入和暂时收入的两种分解方法的省际面板模型检验持久收入假说的三个假设.结果发现,我国城镇居民消费与持久收入和暂时收入均存在显著的相关关系,暂时收入的边际消费倾向不为零;就诸省份而言,暂时收入的边际消费倾向不同.进一步探讨了持久收入假说不能完全解释我国城镇居民消费行为的原因."λ假说"检验表明,城镇居民消费对当期收入过度敏感,其呈现理性化趋势.     

Three decades of money demand studies: differences and similarities

Recent empirical contributions on procyclical productivity have focused on the dynamic implications of persistent aggregate fluctuations on sectoral productivity. Given a permanent innovation in aggregate output, unobserved variations of labour (or capital) utilization may have only a transitory effect on measured productivity, whereas external effects should produce permanent effects. It is found that persistent aggregate fluctuations have a permanent effect on productivity of four-digit US manufacturing industries. While a number of alternative explanations of this evidence are discussed and ruled out, the findings are consistent with a simple model with external or thick market effects.     

Product innovation,process innovation and export propensity: persistence,complementarities and feedback effects in Spanish firms

Drawing on a longitudinal data of Spanish manufacturing firms, this study explores the persistence of technological innovation and exports, their potential complementary relations and feedback effects. Empirical results suggest the presence of both true and spurious state dependence in all three activities. True state dependence in technical innovation and exports implies intertemporal spillovers relevant to the evaluation of innovation and export policy measures. However, given that results also suggest spurious state dependence, firm-specific characteristics should be taken into account in promoting technological innovations and exports. In addition, we find a strong complementarity between product and process innovation both through a contemporaneous effect and via unobserved firm characteristics. However, concerning complementarity between innovation and exports, results suggests complementarity only through contemporaneous effects. Finally, we find no support for the causal link from past product and process innovations to current export activities.     

Government spending, capital accumulation and the optimal policy rule: The role of public service capital

In this paper, we modify the Djajić [Djajić, S., 1987. “Government Spending and the Optimal Rates of Consumption and Capital Accumulation,” Canadian Journal of Economics 20, 544–554.] model in such a way that government consumption expenditure provides utility to households via the total stock of government services rather than the government consumption flow alone. By using such a framework, we show that the optimality condition for the public service capital stock is the marginal rate of substitution between public service capital and consumption that equals the intertemporal marginal rate of transformation between the two goods. In addition, we show that the relationship between private consumption and public service capital in a household's utility plays an important role in determining the transitional behavior of relevant variables. We also examine the second-best government consumption expenditure policy. By contrast, in the standard flow specification, e.g., Turnovsky and Brock [Turnovsky, S.J. and Brock, W.A., 1980. “Time Consistency and Optimal Government Policies in Perfect Foresight Equilibrium,” Journal of Public Economics 13, 183–212.], Ihori [Ihori, T., 1990. “Government Spending and Private Consumption,” Canadian Journal of Economics 23, 60–69.], and Turnovsky and Fisher [Turnovsky, S.J. and Fisher, W.H., 1995. “The Composition of Government Expenditure and its Consequences for Macroeconomic Performance,” Journal of Economic Dynamics and Control 19, 747–786.], the second-best government consumption expenditure is decided on the basis that the marginal utility of consumption is equal to the discounted sum of the marginal utility of the government's flow spending.     

Hours risk and wage risk: repercussions over the life cycle*

We decompose earnings risk into contributions from hours and wage shocks. To distinguish between hours shocks, modeled as innovations to the marginal disutility of work, and labor supply reactions to wage shocks, we formulate a life-cycle model of consumption and labor supply. For estimation, we use data on married American men from the Panel Study of Income Dynamics. Permanent wage shocks explain 31 percent of total risk, permanent hours shocks 21 percent. Progressive taxation attenuates cross-sectional earnings risk, but its life-cycle insurance impact is much smaller. At the mean, a one-standard-deviation hours shock raises lifetime income by 11 percent, a wage shock by 13 percent.