Using Subjective Income Expectations to Test for Excess Sensitivity of Consumption to Predicted Income Growth

Jappelli, Tullio; Pistaferri, Luigi

doi:10.2139/ssrn.143052

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Using Subjective Income Expectations to Test for Excess Sensitivity of Consumption to Predicted Income Growth

University of Salerno Working Paper No. 12

29 Pages Posted: 19 May 1999

See all articles by Tullio Jappelli

Tullio Jappelli

University of Naples Federico II - Department of Economics and Statistics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Center for Studies in Economics and Finance - CSEF; CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Luigi Pistaferri

Centre for Economic Policy Research (CEPR); Stanford University

Date Written: December 1998

Abstract

We test for precautionary saving and excess sensitivity of consumption to predicted income growth using a 1989-93 panel survey of Italian households that has measures of subjective income and inflation expectations. These expectations provide a powerful instrument for predicting income growth. The empirical specification controls for predictable changes in labor supply and allows a fairly general specification for the stochastic structure of the forecast error. We find that consumption growth is positively correlated with the expected variance of income and uncorrelated with predicted income growth. Overall, the results support the precautionary saving model.

JEL Classification: E21

Suggested Citation: Suggested Citation

Jappelli, Tullio and Pistaferri, Luigi and Pistaferri, Luigi, Using Subjective Income Expectations to Test for Excess Sensitivity of Consumption to Predicted Income Growth (December 1998). University of Salerno Working Paper No. 12, Available at SSRN: https://ssrn.com/abstract=143052 or http://dx.doi.org/10.2139/ssrn.143052