Can Consumers Distinguish Persistent from Transitory Income Shocks?

Publikation: Bidrag til tidsskriftTidsskriftartikelfagfællebedømt

The degree to which consumers can distinguish persistent from transitory income shocks is paramount for consumption-saving dynamics. In particular, even a small amount of imperfect information causes a severe bias in conventional estimators of the marginal propensity to consume. We provide a novel method that can identify consumers’ degree of information by using panel data on income and consumption, even allowing for measurement error. Employing our method to data from the Panel Study of Income Dynamics, we find that households have almost perfect information. This robust result indicates that the conventional estimators of the marginal propensity to consume are on firm ground.
TidsskriftThe Economic Journal
Udgave nummer632
Sider (fra-til)2410–2437
StatusUdgivet - nov. 2020

ID: 252111260