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Euler Equations, Subjective Expectations and Income Shocks.

Attanasio, Orazio; Kovacs, Agnes; Molnar, Krisztina
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URI
http://hdl.handle.net/11250/2437055
Date
2017-04
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  • Discussion papers (SAM) [578]
Abstract
In this paper, we make three substantive contributions: first, we use elicited subjective income expectations to identify the levels of permanent and transitory income shocks in a life-cycle framework; second, we use these shocks to assess whether households' consumption is insulated from them; third, we use the shock data to estimate an Euler equation for consumption. We find that households are able to smooth transitory shocks, but adjust their consumption in response to permanent shocks, albeit not fully. The estimates of the Euler equation parameters

with and without expectational errors are similar, which is consistent with rational expectations. We break new ground by combining data on subjective expectations about future income from the Michigan Survey with micro data on actual income from the Consumer Expenditure Survey.
Publisher
Institutt for samfunnsøkonomi, NHH
Series
DP SAM;05

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