asset pricing implications of pareto optimality with private information we compare the empirical performance of a standard incomplete markets asset pricing model with that of a novel model with constrained pareto optimal allocations we represent the models stochastic discount factors in terms of the cross sectional distribution of consumption and use these representations to evaluate the models empirical implications the first model is inconsistent with the equity premium in the united states united kingdom and italy the second model is consistent with the equity premium and the risk free rate in all three countries if the coefficient of relative risk aversion is roughly 5 and the quarterly discount factor is less than 0 5

estimating the elasticity of intertemporal substitution using mortgage notches using a novel source of quasi experimental variation in interest rates we develop a new approach to estimating the elasticity of intertemporal substitution eis in the u k the mortgage interest rate features discrete jumps notches at thresholds for the loan to value ltv ratio these notches generate large bunching below the critical ltv thresholds and missing mass above them we develop a dynamic model that links these empirical moments to the underlying structural eis the average eis is small around 0 1 and quite homogeneous in the population this finding is robust to structural assumptions and can allow for uncertainty a wide range of risk preferences portfolio reallocation liquidity constraints present bias and optimization frictions our findings have implications for the numerous calibration studies that rely on larger values of the eis

risk sharing by households within and across regions and industries abstract cochrane 1991 journal of political economy 99 957 976 and mace 1991 journal of political economy 99 928 956 test if risk sharing across households is complete in the sense that household consumption moves one for one with aggregate consumption in their studies the source of income risk is idiosyncratic and agents can share risk across the entire economy using a sample of households from the panel study on income dynamics psid we explore whether households share the risk associated with their industries and regions across households in other regions and industries we find that a large fraction of risk faced by households is not shared across regions and industries

wealth accumulation over the life cycle and precautionary savings this article constructs and simulates a life cycle model of wealth accumulation and estimates the parameters of the utility function the rate of time preference and the coefficient of risk aversion by matching the simulated median wealth profiles with those observed in the panel study of income dynamics and in the survey of consumer finances the estimates imply a low degree of patience and a high degree of risk aversion the results are used to study the importance of precautionary savings in explaining wealth accumulation they imply that wealth accumulation is driven mostly by precautionary motives at the beginning of the life cycle whereas savings for retirement purposes become significant only closer to retirement

food insecurity and public assistance this paper examines if welfare programs reduce the probability that vulnerable households experience food deprivation because of financial constraints although the 1996 welfare reform legislation specifically limited the eligibility of immigrant households to receive assistance many states chose to protect their immigrant populations by offering state funded aid to these groups i exploit these changes in eligibility rules to examine the link between food insecurity and public assistance the evidence indicates that a 10 percentage point cut in the fraction of the population that receives public assistance increases the fraction of food insecure households by about 5 percentage points

uninsurable risk and financial market puzzles abstract we compare the empirical performances of three risk sharing arrangements involving idiosyncratic skill shocks a where individuals are unable to directly insure their consumption against individual specific shocks b where agents strike long term insurance contract with financial intermediaries involving a truth revelation constraint as in kocherlakota and pistaferri 2009 c full risk sharing based on the widely accepted assumption of cross sectional log normality of individual consumption levels we work out closed form expressions of the pricing kernels for a and b we put these three models to test four financial market anomalies namely the equity premium currency premium risk free rate and consumption real exchange rate puzzles simultaneously in an integrated framework we find that the pricing kernel associated with a outperforms the other two models in terms of the produced estimates of the agent s preference parameters and the model ability to predict the equity and currency premia the risk free rate and the log growth in the exchange rate however the predictive ability is still far from satisfactory for all three models under scrutiny

consumer response to the reagan tax cuts abstract this paper uses micro data from the consumer expenditure survey to estimate the response of household consumption to the second and third phases of the reagan tax cuts since these phases were pre announced they allow for an unusually clean test of the canonical life cycle permanent income model consumption is found to be excessively sensitive to the tax cuts counter to the model liquidity constraints and other standard explanations do not appear to explain this excess sensitivity the consumption response is larger than previously estimated for tax refunds and more concentrated in nondurables these differences have important implications for the structure of tax changes in particular for choosing between varying withholding rates versus varying lumpy final tax payments and refunds

consumer demand and the life cycle allocation of household expenditures the purpose of this paper is to estimate the parameters of household preferences that determine the allocation of goods within the period and over the life cycle using micro data in doing so the authors are able to identify important effects of demographics labor market status and other household characteristics on the intertemporal allocation of expenditure they test the validity of the life cycle model using excess sensitivity tests and find that controlling for demographics and labor market status variables can largely explain the excess sensitivity of consumption to anticipated changes in income

the hyperbolic consumption model calibration simulation and empirical evaluation ur preferences for the long run tend to conflict with our short run behavior when planning for the long run we intend to meet our deadlines exercise regularly and eat healthfully but in the short run we have little interest in revising manuscripts jogging on the stairmaster and skipping the chocolate souffleala mode delay of gratification is a nice long term goal but instant gratification is disconcertingly tempting this gap between long run intentions and short run actions is apparent across a wide range of behaviors including saving choices a 1997 survey found that 76 percent of respondents believe they should be saving more for retirement looking only at respondents who believed they were at an age where you should be seriously saving already the survey found that 55 percent reported being behind in their savings and only 6 percent reported being ahead farkas and johnson 1997 the report on the survey concluded t he gaps between people s atti tudes intentions and behavior are troubling and threaten increased insecurity and dissatisfaction for people when they retire americans are simply not doing what logic and their own reasoning suggests they should be doing a 1993 luntz webber merrill lynch survey found similar answers when baby boomers were asked what percentage of your annual household income do you think you should save for retirement and what percentage of your annual

testing the response of consumption to income changes with noisy panel data this paper tests the rational expectations lifecycle model of consumption against i a keynesian model and ii the rational expectations lifecycle model with imperfect capital markets the tests are based upon the relative responsiveness of consumption to income changes that can be predicted from past information and income changes that cannot he predicted the tests allow for measurement error in income the results reject the keynesian model and generally support the lifecycle model but the results are not sufficiently precise to rule out the possibility that some households are liquidity constrained measurement error has a strong influence on the relationship between consumption and income

implicit contracts life cycle labor supply and intertemporal substitution the implicit contract model is a serious alternative to the spot market interpretation of the labor market however its usefulness has been limited because the wage is unobserved and hence it has not been possible to estimate an intertemporal frisch supply elasticity for the model using microdata in this article we show that one can estimate this elasticity from microdata within the context of the implicit contract model under relatively weak assumptions based on consumer theory we implement our approach on two micro data sets and for both obtain a reasonably precise elasticity estimate of approximately 1 0

using subjective income expectations to test for excess sensitivity of consumption to predicted income growth abstract we test for precautionary saving and excess sensitivity of consumption to predicted income growth using a 1989 1993 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

generalized disappointment aversion and asset prices we characterize generalized disappointment aversion gda risk preferences that can overweight lower tail outcomes relative to expected utility we show in an endowment economy that recursive utility with gda risk preferences generates effective risk aversion that is countercyclical this feature comes from endogenous variation in the probability of disappointment in the representative agent s intertemporal consumption saving problem that underlies the asset pricing model the variation in effective risk aversion produces a large equity premium and a risk free rate that is procyclical and has low volatility in an economy with a simple autoregressive endowment growth process the observed facts of aggregate risks and asset prices in the post war u s economy have led researchers to explore models of intertemporal preferences that generalize the well developed time additive expected utility specification used in the asset pricing economy of lucas 1978 in particular models that allow for countercyclical risk aversion have been shown to perform much better than the standard model see e g campbell and cochrane 1999 gordon and st amour 2000 and barberis huang and santos 2001 1 this leads us to explore the preference foundations that may produce this behavior endogenously our preference specification is a one parameter extension of the gul 1991 disappointment aversion utility function these new preferences

micro versus macro consumption data the cyclical properties of the consumer expenditure survey the consumer expenditure survey cex offers the most comprehensive consumption data at the consumer level for the united states several previous studies have shown a large gap between per capita consumption from the cex and the aggregate personal consumption expenditure pce series while previous research has focused on consumption levels we focus on the cyclical properties of consumption we find that the cyclical properties of consumption expenditure data from the two sources are quantitatively very different this result calls for caution when using cex data for business cycle research

does it pay for women to volunteer this article estimates the economic and noneconomic returns to volunteering for prime aged women estimates of a dcdp model indicate that an extra year of volunteer experience increases wage offers by 8 5 in future part time work and by 2 6 in future full time work on average working for free increases lifetime earnings by 16 7 the economic returns to volunteering are more important than the noneconomic returns in increasing lifetime utility the model also reveals an adverse selection mechanism into volunteering that helps explain why reduced form regressions of the returns to working for free will likely be downward biased

downside risk and stock returns in the g7 countries an empirical analysis of their long run and short run dynamics abstract any risk return tradeoff analysis in aggregate equity markets relies on appropriate measures of risk in most studies based on co variance relations consequently in integrated global markets country specific expected return is priced with a world price of covariance risk this study relates domestic excess stock returns to the world downside risk evidence shows that downside tail risk as a multiplier of volatility has long memory cointegration properties hence the underlying risk aversion behavior in an integrated market is associated with the conditional quantile ratio the correlation of stock returns and the cointegrating coefficient of downside risk our empirical results based on g7 countries indicate that investors are averse to downside risk which via cornish fisher expansions is related to higher moment risk and interpretable in a utility based decision framework

the retirement consumption puzzle a marital bargaining approach abstract evidence from several countries reveals a substantial drop in household consumption around the age of retirement that is difficult to explain with life cycle models using food consumption data from more than 550 households from the panel study of income dynamics for the years 1979 1986 and 1989 1992 we find that married couple households decrease their expenditures on both food consumed at home and away from home by about 9 following the retirement of the male household head no significant decrease in consumption is found for single households either in a sample of males or a pooled sample of single males and females these results are consistent with a model of marital bargaining in which wives prefer to save more than their husbands do to support an expected longer retirement period and relative control over household decisions is affected by control over market income the pattern of the consumption decline which is increasing in the age gap between husband and wife lends further support to this interpretation

a theory of disappointment aversion an axiomatic model of preferences over lotteries is developed it is shown that this model is consistent with the allais paradox includes expected utility theory as a special case and is only one parameter beta richer than the expected utility model allais paradox type behavior is identified with positive values of beta preferences with positive beta are said to be disappointment averse it is shown that risk aversion implies disappointment aversion and that the arrow pratt measures of risk aversion can be generalized in a straight forward manner to the current framework copyright 1991 by the econometric society

household heterogeneity and real exchange rates we assume that individuals can fully insure themselves against cross country shocks but not against individual specifi cs hocks we consider two particular models of limited risk sharing domestically incomplete markets di and private information pareto optimal pipo risk sharing for each model we derive a restriction relating the cross sectional distributions of consumption and real exchange rates we evaluate these restrictions using household level consumption data from the us and the uk we show that the pipo restriction fits the data well when households have a coefficient of relative risk aversion of around 5 the restrictions implied by the complete risk sharing model and the di model fare poorly this paper was prepared for the economic journal lecture at the 2006 royal economic society meetings kocherlakota thanks winnie choi for many stimulating conversations about real exchange rates kocherlakota acknowledges the support of nsf 0305833 and 0606695 we thank an associate editor of the journal george alessandria and ivan werning for helpful comments jaromir nosal and sonam sherpa for research assistance orazio attanasio and andrew leicester for help with the fes data and joan gieseke and hakki yazici for editorial assistance the views expressed herein are those of the authors and not necessarily those of the federal reserve bank of minneapolis or the federal reserve system

unemployment risk labour force participation and savings this paper analyses labour force participation and precautionary savings in the presence of risks of being fired or failing to secure a job offer when out of the labour market we use a finite horizon framework with two employment states and a stage utility function which is cara in consumption but non separable in leisure the results are that there is precautionary labour force participation employment risk lowers the reservation wage generally it also reduces consumption however due to the non separability assumption precautionary savings as usually defined may not be positive we characterize the reservation wage and contrast the results with those in which the stage utility is additive in leisure and consumption we extend the analysis to study the effects of cyclical variation in employment risk of stochastic future wage rates and of adding a third employment state of search

consumer bankruptcy a fresh start consumer bankruptcy provides partial insurance against bad luck but by driving up interest rates makes life cycle smoothing more difficult we argue that to assess this trade off one needs a quantitative model of consumer bankruptcy with three key features life cycle component idiosyncratic earnings uncertainty and expense uncertainty exogenous negative shocks to household balance sheets we find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules more persistent shocks make the bankruptcy option more desirable larger transitory shocks have the opposite effect our findings suggest the current us bankruptcy system may be desirable for reasonable parameter values jel d14 d91 k35

household search and the aggregate labor market we develop a theoretical model with labour market frictions incomplete financial markets and with households which have two members households face unemployment risks but their members adjust their labour supplies to insure against unemployment we use the model to explain the cyclical properties of aggregate employment and participation as in the u s data the model predicts that the participation rate the fraction of individuals that want jobs is not strongly correlated with aggregate economic activity this property is in sharp contrast to the strongly procyclical participation predicted by both neoclassical models and models with search frictions when we assume bachelor households or households with infinitely many members complete markets in the two member household model and in the data primary earners are always in the labour force secondary earners have a mildly countercyclical participation rate and a mildly procyclical employment rate their behaviour insures the household against unemployment risks

temptation and self control some evidence and applications this paper studies the empirical relevance of temptation and self control using household level data from the consumer expenditure survey we construct an infinite horizon consumption savings model that allows but does not require temptation and self control in preferences in the presence of temptation a wealth consumption ratio in addition to consumption growth becomes a determinant of the asset pricing kernel and the importance of this additional pricing factor depends on the strength of temptation to identify the presence of temptation we exploit an implication of the theory that a more tempted individual should be more likely to hold commitment assets such as individual retirement account ira or 401 k accounts our estimation provides empirical support for temptation preferences based on our estimates we explore some quantitative implications of this class of preferences for capital accumulation in a neoclassical growth model and the welfare cost of the business cycle

deconstructing life cycle expenditure we revisit two well known facts regarding life cycle expenditures the hump shaped profile of nondurable expenditures and the increase in cross household consumption inequality we document that the behavior of total nondurables masks surprising heterogeneity in the life cycle profile of individual consumption subcomponents we provide evidence that the categories driving life cycle consumption either are inputs into market work or are amenable to home production using a quantitative model we document that the disaggregated life cycle consumption profiles imply a level of uninsurable permanent income risk that is substantially lower than that implied by a model using a composite consumption good

intertemporal consumption durables and liquidity constraints a cohort analysis we provide a theoretical framework to analyse the response of life time maximizing consumers to intertemporal prices of non durable goods and durable goods when the borrowing limit depends on the market value of the stock of durables owned by the consumer we use pseudo panel data on purchases of non durables and durable goods cars and demographic characteristics from the uk family expenditure survey as well as estimates of the durable stock constructed using the uk national travel survey to estimate the equations derived in the first part of the paper we evaluate the shadow prices of these restrictions which were significantly positive for younger consumers in the mid seventies and immediately prior to the 1982 financial liberalisation

dynamic correlation analysis of financial contagion evidence from asian markets we apply a dynamic conditional correlation model to nine asian daily stock return data series from 1990 to 2003 the empirical evidence confirms a contagion effect by analyzing the correlation coefficient series we identify two phases of the asian crisis the first shows an increase in correlation contagion the second shows a continued high correlation herding statistical analysis of the correlation coefficients also finds a shift in variance during the crisis period casting doubt on the benefit of international portfolio diversification evidence shows that international sovereign credit rating agencies play a significant role in shaping the structure of dynamic correlations in the asian markets

is consumption growth consistent with intertemporal optimization evidence from the consumer expenditure survey in this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in u s household level data we propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations we estimate preference parameters using the only u s micro data set with complete consumption information we show that previous rejections can be explained by the simplifying assumptions made in previous studies we also show that results obtained using good consumption or aggregate data can be misleading

static and intertemporal household decisions we discuss the most popular static and dynamic models of household behavior our main objective is to explain which aspects of household decisions different models can account for using this insight we describe testable implications identification results and estimation findings obtained in the literature particular attention is given to the ability of different models to answer various types of policy questions

yours mine and ours do divorce laws affect the intertemporal behavior of married couples divorce laws establish spouses individual property rights over household resources and determine when divorce is allowed this paper examines how such laws inuence the intertemporal behavior and the welfare of u s married couples i build a model of household choice about consumption labor supply and divorce under multiple divorce law regimes and i estimate it using exogenous variation in u s divorce laws from the 1970s to the 1990s couples responded to equal division of property and unilateral divorce by increasing tangible assets up to 19 which suggests the presence of a strong income eect for the primary earner and by reducing female employment by over 5 percentage points because the threat of divorce granted additional bargaining power to married woman the bargaining weight of women implied by these responses in the model corresponds to a third of the weight of men this indicates that equal division of assets beneted women when it was

life cycle expenditure allocations and the consumption costs of children abstract in this paper we assess whether it is changing needs or intertemporal substitution that dominate household expenditure responses to the presence of children over the life cycle we construct lifetime expenditure paths for households with different demographic profiles and consider the shape of these paths and some possible implications for welfare measures simulated expenditure paths based on consistent single period and multi period models indicate that it is indeed changing needs that dominate such paths in periods when children are present in the household however allowing for intertemporal substitution is still shown to be important since it can introduce new information relevant to the calculation of household welfare

market incompleteness and the equity premium puzzle evidence from state level data abstract this paper investigates the importance of market incompleteness by comparing the rates of risk aversion estimated from complete and incomplete markets environments for the incomplete markets case we use consumption data for the 50 us states we find that the rate of risk aversion under the incomplete markets setup is much lower furthermore including the second and third moments of the cross sectional distribution of consumption growth in the pricing kernel lowers the estimate of risk aversion these findings suggest that market incompleteness ought to be seen as an important component of solutions to the equity premium puzzle

disability earnings income and consumption using longitudinal data for the period 1968 2005 for a sample of male household heads we determine the prevalence of disability during the working years and examine how the extent of disability affects a range of outcomes including earnings income and consumption we have seven main findings first disability rates are high we divide the disabled along two dimensions based on the persistence and severity of their work limiting condition we estimate that a person reaching age 56 has a 53 percent chance of having been disabled at least once during his working years and a 19 percent chance that he has begun a chronic and severe disability second the economic consequences of disability are frequently profound ten years after disability onset a person with a chronic and severe disability on average experiences a 68 percent decline in earnings a 32 percent decline in after tax income a 22 percent decline in food and housing consumption and a 21 percent decline in food consumption third the various economic consequences differ sharply across disability groups the outcome declines for those with a chronic and severe disability are often more than twice as large as those for the average disabled fourth our findings show the partial and incomplete roles that individual savings family support and social insurance play in reducing the consumption drop that follows disability only about half of this most disabled group reports receiving social security disability insurance or supplemental security income fifth we find a noticeable fall in earnings and income prior to the onset of a reported disability consumption also falls somewhat suggesting that future disability is partially but incompletely predictable in the short run sixth time use and detailed consumption data further indicate that disability is associated with a decline in well being seventh the quantities we have estimated combined with elasticities from the literature allow us to examine the optimality of current compensation for the disabled we find that the current compensation for our most disabled group appears to be lower than is optimal

household intertemporal behaviour a collective characterization and a test of commitment in this paper a formal test of intra household commitment is derived and performed to that end two models of household intertemporal behaviour are developed in both models household members are characterized by individual preferences in the first formulation household decisions are always on the ex ante pareto frontier in the second model the assumption of intra household commitment required by ex ante efficiency is relaxed it is shown that the full efficiency household euler equations are nested in the no commitment euler equations using this result the hypothesis that household members can commit to future allocations of resources is tested using the consumer expenditure survey i strongly reject this hypothesis it is also shown that the standard unitary framework is a special case of the full efficiency model however if household members are not able to commit household intertemporal behaviour cannot be characterized using the standard life cycle model these findings have two main implications first policy makers can change household behaviour by modifying the decision power of individual household members second to evaluate programmes designed to improve the welfare of household members it would be beneficial to replace the standard unitary model with a characterization of household behaviour that allows for lack of commitment

downside loss aversion and portfolio management downside loss averse preferences have seen a resurgence in the portfolio management literature this is due to the increasing use of derivatives in managing equity portfolios and the increased use of quantitative techniques for bond portfolio management we employ the lower partial moment as a risk measure for downside loss aversion and compare mean variance m v and mean lower partial moment m lpm optimal portfolios under nonnormal asset return distributions when asset returns are nearly normally distributed there is little difference between the optimal m v and m lpm portfolios when asset returns are nonnormal with large left tails we document significant differences in m v and m lpm optimal portfolios this observation is consistent with industry usage of m v theory for equity portfolios but not for fixed income portfolios

measuring intertemporal substitution the importance of method choices and selective reporting i examine 2 735 estimates of the elasticity of intertemporal substitution in consumption eis reported in 169 published studies the literature shows strong selective reporting researchers discard negative and insignicant estimates too often which pulls the mean estimate up by about 0 5 the reporting bias dwarfs the effects of methods with the exception of the choice between micro and macro data when i correct the mean for the bias for macro estimates i get zero even though the reported t statistics are on average two the corrected mean of micro estimates of the eis for asset holders is around 0 3 0 4 calibrations greater than 0 8 are inconsistent with the bulk of the empirical evidence jel e21 c83

consumption volatility liquidity constraints and household welfare we evaluate the impact of increased income uncertainty and financial liberalisation in the us on consumption volatility and household welfare we estimate euler equations and measure the volatility of unpredictable changes in consumption as the squared residuals we directly control for liquidity constraints using survey of consumer finances data on access to credit and document that despite the increase in household debt between 1983 and 2007 there was no decline in the proportion of liquidity constrained households consumption volatility increased significantly over this period especially for liquidity constrained households indicating substantial welfare losses

the elasticity of intertemporal substitution new evidence from 401 k participation abstract using health and retirement study data and a structural econometric model we exploit variation in employer matching rates in 401 k plans to generate new estimates of the eis 0 74 in our richest specification with a 95 confidence interval of 0 37 1 21

decreasing relative risk aversion risk sharing and the permanent income hypothesis this article develops a method for testing the risk sharing hypothesis rsh against various versions of the permanent income hypothesis pih while allowing for heterogeneity in risk preferences across households using 1 year and longer differences in household total nondurable consumption data from indian villages we find evidence that favors the rsh over the pih at the village level

measuring financial asset return and volatility spillovers with application to global equity markets we provide a simple and intuitive measure of interdependence of asset returns and or volatilities in particular we formulate and examine precise and separate measures of return spillovers and volatility spillovers our framework facilitates study of both non crisis and crisis episodes including trends and bursts in spillovers and both turn out to be empirically important in particular in an analysis of sixteen global equity markets from the early 1990s to the present we find striking evidence of divergent behavior in the dynamics of return spillovers vs volatility spillovers return spillovers display a gently increasing trend but no bursts whereas volatility spillovers display no trend but clear bursts

constrained labor supply and risk aversion abstract this paper extends previous work by showing that consumption constraints typically increase individuals risk aversion even if the illiquid good e g leisure has good substitutes calibrations indicate time use constraints may raise risk aversion considerably under many common scenarios

risk and return long run relations fractional cointegration and return predictability univariate dependencies in market volatility both objective and risk neutral are best described by long memory fractionally integrated processes meanwhile the ex post difference or the variance swap payoff reflecting the reward for bearing volatility risk displays far less persistent dynamics using intraday data for the standard poor s 500 and the volatility index vix coupled with frequency domain methods we separate the series into various components we find that the coherence between volatility and the volatilityrisk reward is the strongest at long run frequencies our results are consistent with generalized long run risk models and help explain why classical efforts of establishing a

the life cycle model of consumption and saving a central implication of life cycle models is that agents smooth consumption we review the empirical evidence on smoothing at frequencies from within the year up to across a lifetime we find that life cycle models particular those which incorporate realistic features of markets and goods have more empirical successes than failures we also show that some apparent deviations from theoretical predictions imply very small welfare losses for agents finally we emphasize that the coherence of life cycle models imposes an important discipline when incorporating new features into models

the intertemporal elasticity of substitution an analysis based on japanese data this paper investigates whether the intertemporal elasticity of substitution ies for japan possesses similar properties to that found for the united states in the literature as the existing empirical findings are mixed there is no clear consensus this paper uses a model with both production and non separability between nondurables and durables in order to control for possible factors that cause a bias in the ies we present the empirical results demonstrating that the ies is quite similar between the two countries

the use of structural models in econometrics costas meghir has been supported by the cowles foundation and the institution for social and policy studies isps at yale university

further evidence of excess sensitivity of consumption nonseparability among goods and heterogeneity across households the standard theoretical framework for analysing households intertemporal decisions is the life cycle permanent income model among its implications testing the model allows to analyse the response of consumption to fiscal policy however the empirical literature with microdata has yielded mixed results this article examines the sensitivity of the results to the assumption of separability among goods and of homogeneity across households for that purpose we test a rational expectations permanent income model with household data drawn from the spanish family expenditure survey this survey contains detailed information on total expenditure and the income presents large exogenous quarterly changes due to an institutional feature the article shows that assuming separability among commodities biases the test against the model when separability is not imposed we show that the rejection of the model depends on heterogeneity across households in terms of their members being unemployed or not for those

two birds with one stone female labor supply fertility and market childcare abstract the correlation between the female labor force participation rate fpr and the total fertility rate tfr has switched from negative to positive in some developed countries in this paper we show how increasing the substitutability between maternal time and market childcare can raise both fpr and tfr and provide an explanation for the change in the tfr fpr correlation simulations of a life cycle model of married women s work and fertility decisions indicate that the fpr increases whereas the tfr is u shaped with regard to substitutability the dynamic relationship depends on the relative strength of behavioral and composition effects greater substitutability allows working women to have more children but it also attracts less productive women to enter the labor force who trade childbirths for labor supply the findings imply that raising substitutability to a sufficiently high level can achieve the two seemingly conflicting goals increasing female labor force participation and fertility rates

empirical evidence on satisfaction with privatization in latin america since the 1980s privatization of formerly state owned firms has been extensively implemented by governments across latin america despite the fact that most evaluations of the process fail to find significant adverse efficiency and welfare effects there has been a strong surge in public discontent with such policy in the region this paper performs a systematic empirical analysis of the determinants of such dissatisfaction using survey data from latinobarometro covering 17 countries over the period 1998 2008 complemented by country level data on macroeconomic political and institutional aspects as well as data on privatization dissatisfaction appears to respond to absolute and relative welfare effects and the authors find a robust u shaped effect in term of education and income levels with individuals in the middle of such distributions being more critical with the outcome of privatizations

intergenerational risk sharing and endogenous labour supply within funded pension schemes funded defined benefit pensions add to welfare on account of providing intergenerational risk sharing but lower it on account of inducing labour supply distortions we show that a properly designed funded defined benefit pension scheme involves a welfare improvement even if contributions are distortionary and even if individuals face potentially correlated wage and equity risks numerical calculations indicate that diversification gains from risk sharing are large compared to the losses related to labour supply distortions this result withstands a number of extensions like the introduction of a short sale constraint for individuals or the inclusion of a labour income tax

the pricing of call and put options on foreign exchange this paper derives pricing equations for european puts and calls on foreign exchange the call and put pricing formulas are unlike the black scholes equations for stock options in that there are two relevant interest rates interest rates are stochastic and boundary constraints differ in addition it is shown that both american call and put options have values larger than their european counterparts

lifetime income and housing affordability in singapore most commonly used measures of housing affordability are essentially short run indicators that compare current income with house prices or housing costs despite the emphasis in the literature on t

the effects of health wealth and wages on labour supply and retirement behaviour this paper estimates a life cycle model of labour supply retirement and savings behaviour in which future health status and wages are uncertain individuals face a fixed cost of work and cannot borrow against future labour pension or social security income the method of simulated moments is used to match the life cycle profiles of labour force participation hours worked and assets that are estimated from the data to those that are generated by the model the model establishes that the tax structure of the social security system and pensions are key determinants of the high observed job exit rates at ages 62 and 65 removing the tax wedge embedded in the social security earnings test for individuals aged 65 and older would delay job exit by almost one year by contrast social security benefit levels health and borrowing constraints are less important determinants of job exit at older ages for example reducing social security benefits by 20 would cause workers to delay exit from the labour force by only three months

valuation and martingale properties of shadow prices an exposition abstract concepts of asset valuation based on the martingale properties of shadow or marginal utility prices in continuous time infinite horizon stochastic models of optimal saving and portfolio choice are reviewed and compared with their antecedents in static or deterministic economic theory applications of shadow pricing to valuation are described including a new derivation of the black scholes formula and a generalised net present value formula for valuing an indivisible project yielding a random income some new results are presented concerning i the characterisation of an optimum in a model of saving with an exogenous random income and ii the use of random time transforms to replace local by true martingales in the martingale and transversality conditions for optimal saving and portfolio choice

fiscal policy in good times and bad in the 1980s several countries with large government debt or deficit implemented substantial and in some cases drastic deficit cuts contrary to widespread expectations in many cases private consumption boomed rather than contracted this paper shows that in times of fiscal stress shocks to government revenues and especially expenditure have very different effects on private consumption than in normal times

the response of household consumption to income tax refunds a central implication of the life cycle or permanent income theory is that consumption should not respond to predictable fluctuations in income tests of this implication have yielded mixed results especially on micro data angus deaton 1992 martin browning and annamaria lusardi 1996 in large part this might be due to the difficulties of isolating the predictable component of income at the micro level most tests proceed by instrumenting for income but since the available instruments are typically poor such tests might be prejudiced against finding significant excess sensitivity of consumption to income john shea 1995 also it is not clear how closely the resulting econometric predictions of income coincide with agents actual expectations of income to avoid these difficulties this paper examines the response of household consumption to a particular type of income that is both predictable and transitory income tax refunds since a refund depends on events in the previous calendar year it is predictable income as regards consumption in the year of its receipt consequently under the life cycle theory consumption should not increase on receipt of a refund 2 in addition to testing the canonical model of consumption this paper provides estimates interpretable as the marginal propensity to consume mpc out of refunds since federal tax refunds now amount to over 80 billion per year averaging well over 1 000 per refund these estimates are of interest in themselves more generally they bear on the impact of even preannounced and temporary changes in fiscal policy the paper begins by surveying related studies in section i section ii describes the data the consumer expenditure survey cex which of the leading u s micro data sets has the most comprehensive coverage of expenditure the empirical specification is set out in section hi section iv reports the results and section v concludes

the effect of income taxation on consumption and labor supply we estimate the incentive effects of income taxation in a life cycle model of consumption and labor supply without intratemporal strong separability we find that consumption and hours worked are direct complements in utility both increase with a compensated increase in the net wage the compensated net wage elasticity is about 0 3 nearly double estimates for u s men from a linear labor supply specification estimated intertemporal elasticities indicate significant intertemporal smoothing of utility the estimated marginal welfare cost of government revenue is 6 20 which is about half the estimated welfare cost when additivity between consumption and leisure is incorrectly imposed

can social security be welfare improving when there is demographic uncertainty abstract this paper studies the welfare implications of a payg pension system in an overlapping generations olg model with demographic uncertainty and incomplete markets in the absence of public pensions small cohorts tend to be favoured by the changes in relative prices implied by demographic shocks payg defined benefit systems can help to share the financial risks created by this type of demographic uncertainty across generations our careful quantitative analysis test this possibility with unfavourable results the overall welfare impact of the public pensions is negative due to the prominence of the crowding out effect over the insurance effect

job uncertainty and deep recessions abstract we study a model where households are subject to uninsurable unemployment risk price setting is subject to nominal rigidities and the labor market is characterized by matching frictions and inflexible wages higher risk of job loss and worsening job finding prospects during unemployment depress goods demand because of a precautionary savings motive lower goods demand reduces job vacancies and the job finding rate producing an amplification mechanism due to endogenous countercyclical income risk amplification derives from the combination of incomplete financial markets and frictional goods and labor markets the model can account for key features of the great recession

female labor supply as insurance against idiosyncratic risk in this paper we explore the role of female labor supply as an insurance mechanism against idiosyncratic earnings risk within the family we use a life cycle model in which a unitary family makes consumption saving and labor supply decisions additional uncertainty increases female participation rates this effect on participation is greatest when the ability to borrow and hence to smooth consumption is limited we calculate the welfare cost of increases in uncertainty and show that the welfare cost is greater when households are unable to adjust female labor supply jel j22 d91

consumer demand and the role of labour supply and durables in this article i test empirically whether intratemporal preferences between 1 nondurables and labour supply and 2 nondurables and housing are separable in doing so careful attention is paid to the potential endogeneity of the total budget labour supply and housing for housing i offer two separate solutions to the problem of correlation between house size proxied by number of rooms and unobserved heterogeneity first instrument with a children s sex composition dummy and second select on households residing in public housing the results strongly reject separability between nondurables and labour supply for nondurables and housing the results are more mixed

what do we learn about consumer demand patterns from micro data the aim of this paper is to assess the importance of using micro level data in the econometric analysis of consumer demand to do this we utilize a time series of repeated cross sections covering some 4 000 households in each of 15 years employing a number of different aggregation procedures we conclude that aggregate data alone are unlikely to produce reliable estimates of structural price and income coefficients however once certain aggregation factors as well as trend and seasonal components are included an aggregate model is not necessarily outperformed across all demand equations in terms of forecasting ability jel d12 c52 c31 the purpose of this paper is to develop a complete consumer demand system based on a time series of individual household data and to use it to measure the biases introduced into the study of consumer de mand behavior when aggregate data are used in place of the appropriate microeco nomic data we assess the suitability of ag gregate data through the impact on income and price elasticities and by evaluating the ability of both micro and aggregate based models to forecast aggregate consumer de mand the biases introduced by the use of aggregate data depend upon the way that household characteristics interact with in come and price effects and on departures of demand systems from linearity we explore the structure of microeconomic demand sys tems and the role of household characteris tics in the behavior of consumer demand both for the light this may shed on the pattern of future demands and for the im plications this behavior has for issues of aggregation consumer demand patterns typically found in micro data sets vary considerably across households with different household characteristics and with different levels of income we model this variability by making intercept and slope parameters in the budget share equations of our demand sys tem depend on household characteristics and by allowing for nonlinear total log expenditure terms in fact in theory consistent demand systems it is total ex penditure rather than disposable income that is allocated across goods we find that this general framework leads to a well specified data coherent demand system which is a quadratic extension of the popu lar almost ideal model of angus s deaton and john muellbauer 1980 the micro level estimates are shown to be sensitive to the treatment of endogeneity of total expen diture and to the specification of interaction terms with household characteristics in ad dition this specification is also shown to possess many attractive features for the evaluation of aggregate models

heterogeneous life cycle profiles income risk and consumption inequality was the increase in income inequality in the us due to permanent shocks or merely to an increase in the variance of transitory shocks the implications for consumption and welfare depend crucially on the answer to this question we use consumer expenditure survey cex repeated cross section data on consumption and income to decompose idiosyncratic changes in income into predictable life cycle changes transitory and permanent shocks and estimate the contribution of each to total inequality our model fits the joint evolution of consumption and income inequality well and delivers two main results first we find that permanent changes in income explain all of the increase in inequality in the 1980s and 1990s second we reconcile this finding with the fact that consumption inequality did not increase much over this period our results support the view that many permanent changes in income are predictable for consumers even if they look unpredictable to the econometrician consistent with models of heterogeneous income profiles

the carbon footprint of european households and income distribution abstract this paper calculates the carbon footprint of private consumption in the eu27 by five groups of household income using a fully fledged macroeconomic input output model covering 59 industries and five groups of household income for the eu27 due to macroeconomic feedback mechanisms this methodology besides induced intermediate demand also quantifies i private consumption induced in the other household groups ii impacts on other endogenous final demand components and iii negative feedback effects due to output price effects of household demand the carbon footprint is calculated separately for the consumption vector of each of the five income groups the simulation results yield a non linear income elasticity of direct and indirect emissions at each income level the value of the direct footprint income elasticity decreases from 1 32 first quintile to 0 69 fourth quintile the value of the indirect footprint income elasticity is always below unity and decreases from 0 89 to 0 62 the results in general reveal a relative decoupling effect the share of the top income group in income 45 is much larger than its share in the carbon footprint 37 and vice versa for the bottom income group 6 in income and 8 in footprint

why do markets move together an investigation of u s japan stock return comovements this article explores the fundamental factors that affect cross country stock return correlations using transactions data from 1988 to 1992 we construct overnight and intraday returns for a portfolio of japanese stocks using their nyse traded american depository receipts adrs and a matched sample portfolio of u s stocks we find that u s macroeconomic announcements shocks to the yen dollar foreign exchange rate and treasury bill returns and industry effects have no measurable influence on u s and japanese return correlations however large shocks to broadbased market indices nikkei stock average and standard and poor s 500 stock index positively impact both the magnitude and persistence of the return correlations stock return cross country covariances play a key role in international finance changes in these covariances affect the volatility of portfolios and asset prices as these covariances increase one expects that a fewer domestic risks are internationally diversifiable so portfolio volatility increases b the risk premium on the world market portfolio increases 1 c the cost of capital increases for individual firms and d the domestic version of the capm becomes increasingly inadequate 2 despite the important economic consequences of changes in cross country covariances the determinants of the levels and dynamics of these covariances have been little studied from an academic