Discussion Paper Series in Economics, Department of Economics, Norwegian School of Economics (NHH)
Euler Equations, Subjective Expectations and Income Shocks.
(), Agnes Kovacs
() and Krisztina Molnar
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.
Keywords: life cycle models; estimating Euler Equations; survey expectations; (follow links to similar papers)
JEL-Codes: C13; D12; D84; D91; E21; (follow links to similar papers)
39 pages, January 12, 2017
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