Gruber). This hypothesis can be tested by estimating a model of consumption growth against income growth, after controlling for aggregate resources.

There is another stream in consumption behavior literature: the permanent income hypothesis. The permanent income hypothesis predicts that only changes in permanent income will affect consumption growth in a household and that changes in transitory income will not. Recently, many studies make use of quasi-natural experiments to show that consumption responds to anticipated income changes and that consumption is “excessively sensitive” to anticipated income changes (Shea (1995), Parker (1999), Souleles(1999)) while Hsieh (1999) and Browning and Collado (2001) find little evidence that consumption responds to anticipated income changes.

These hypotheses have important distinctions: the full consumption insurance hypothesis emphasizes the role of interpersonal transfers while the permanent income hypothesis addresses self-insurance. Moreover, the permanent income hypothesis has clean distinctions between permanent and transitory income but the full insurance hypothesis does not. This paper examines the full consumption insurance hypothesis and does not distinguish between permanent and transitory income because it is hard to distinguish between them empirically and the available data lack information such as hours of work or overtime that would be necessary to construct a proxy. The specification employed in this paper, discussed later, is a simple model regressing the change in consumption on the change in earnings, including an additional variable of the average consumption across households for the Mace/Cochrane method. Moreover, the full insurance hypothesis in this paper does not exclude self-insurance through saving or dissaving.

There is little research on Japanese consumer behavior using micro-level data. Apart from our studies on Japanese tax policies (see Hori, Hsieh, Murata and Shimizutani [2002], and Hori and Shimizutani [2002]), the only relevant research is, to our knowledge, Kohara, Ohtake and Saito (2001). Following the Mace/Cochrane method, they test the full insurance hypothesis in Japan using the micro-level data of the FIES from 1989 and 1997 and conclude that the hypothesis is strongly rejected.

Although this paper also tests the full insurance hypothesis using the same data set used by Kohara et. al. in different periods, there are some important differences to be mentioned. First, this paper employs both Mace/Cochrane method and Dynarski/Gruber method so it is possible to compare the results of the full consumption insurance hypothesis for Japan with those reported for the U.S.. Second, this research focuses on the effect of earnings variation in head of household under age of 60, not family income as used in Kohara et. al.. As discussed in Dynarski and Gruber, this has advantages of mitigating the endogeneity between family consumption and family income. Third, focusing on the head of household earning makes it possible to evaluate the effect of income shocks as well as the sources of smoothing: other forms of family income such as spouse's income, government insurance or self-saving. Thus, this paper is able to evaluate not only deviations from the full insurance