Dynamic factor models of consumption, hours and income

Consumption inequality and partial insurance

“…We find that consumption inequality − a topic that, with the notable exceptions of Cutler and Katz [1992] and Dynarski and Gruber [1997], has been studied much less extensively than wage inequality − follows closely the trends in permanent earnings inequality documented, among others, by Moffitt and Gottschalk [1994]. 3 Our results point to durable expenditures being an important mechanism for 2 Hall and Mishkin [1982] use panel data on food consumption and income from the PSID and consider the covariance restrictions imposed by the PIH. Altonji, Martins, and Siow [2002] improve on this by estimating a dynamic factor model of consumption, hours, wages, unemployment, and income, again using PSID data.…”

“…Our use of panel data on income and consumption allows us to identify the variance of the income shocks as well as the degree of insurance of consumption with respect to the two types of shocks. 3 The literature on consumption inequality is growing steadily. See, e.g., Attanasio, Battistin and Ichimura [2004], smoothing non-durable consumption in the presence of income shocks especially for low income households.…”

Partial insurance, information and consumption dynamics

“…We do this by contrasting shifts in the distribution of income growth with shifts in the distribution of consumption growth, and analyze the way these two measures of household welfare correlate over time. Our research is related to other papers in the literature, particularly Hall and Mishkin (1982), Altonji et al (2002), Deaton and Paxson (1994), and Blundell and Preston (1998).…”

“…In column (6) we use the sum of food at home and the monetary value of food stamps as our measure of consumption; the coefficient on the permanent shock is lower than in column (2), suggesting that food stamps provide insurance, but the difference is unlikely to be statistically significant. However, when we add the low income subsample (see column 7) the coefficient is much lower and suggests an important insurance role for food stamps.…”

“…In the extreme formulation of this model contracts or other formal or informal arrangements are absent altogether and quadratic preferences are assumed; permanent shocks to income are permanent shocks to consumption. 2 Models that feature a myriad of markets and those that allow for just personal savings as a smoothing mechanism are clearly extreme characterization of individual behavior and of the economic environment faced by the consumers. Deaton and Paxson (1994) notice this and envision "the construction and testing of market models under partial insurance", while Hayashi et al (1996) call for future research to be "directed to estimating the extent of consumption insurance over and above self-insurance".…”