Looking for the News in the Noise - Additional Stochastic Implications of Optimal Consumption Choice / Laurence J. Kotlikoff, Ariel Pakes.

Format:

Book

Author/Creator:

Kotlikoff, Laurence J.

Contributor:

National Bureau of Economic Research.

Pakes, Ariel.

Series:

Working Paper Series (National Bureau of Economic Research) no. w1492.

NBER working paper series no. w1492

Language:

English

Subjects (All):

Consumption (Economics).

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1984.

Cambridge, Mass. : National Bureau of Economic Research, 1984.

Summary:

In neoclassical models of consumption choice under earnings uncertainty changes in consumption programs from one period to the next are determined by new information received about future earnings over the period. This proposition suggests testing the neoclassical model by ascertaining whether new earnings information explains consumption choice through time. It also suggests that actual consumption choices imbed extractable information about the extent and time resolution of earnings uncertainty. This paper derives a fairly general theoretical relationship between properly defined innnovations in consumption (noise) and revisions in expectations of lifetime earnings (news). It also clarifies the relationship between testing for the theoretical determinants of consumption and standard Euler tests that focus on theoretical nondeterminants of consumption. The chief prediction of the paper's theoretical results, that noise exactly equals news, is tested using aggregate time series data on consumption and earnings. We find that new earnings information explains only a very small fraction of the variance of aggregate consumption innovations. On the other hand, the extent of suboptimal consumption choice appears to be of little economic significance.

Notes:

Print version record

November 1984.