Individual Income, Incomplete Information, and Aggregate Consumption

Individual income , incomplete information , and aggregate consumption

In this paper I study a model of life-cycle consumption in which individuals react optimally to their own income process but ignore economy wide information. Since individual income is less persistent than aggregate income consumers will react too little to aggregate income variation. Aggregate consumption will be excessively smooth. Since aggregate information is slowly incorporated into consu...

The Slow Adjustment of Aggregate Consumption to Permanent Income

This paper investigates the relationship between aggregate consumption and permanent income. It applies a new empirical approach to cointegration analysis that builds on Stock and Watson’s (1988a) common stochastic trends representation. The permanent and transitory components of consumption and income are estimated directly using the Kalman filter and are allowed to be correlated. This approac...

Individual versus Aggregate Income Elasticities for Heterogeneous Populations

The paper deals with different concepts of income elasticities of demand for a heterogenous population and the relationship between individual and aggregate elasticities is analyzed. In general, the aggregate elasticity is not equal to the mean of individual elasticities. The difference depends on the heterogeneity of the population and is quantified by a covariance term. Sign and magnitude of ...

Equivalence of Aggregate Queries with Incomplete Information and Dependencies

Macroelasticity vs. Individual Elasiticities: The Case of Consumption and Income

In this paper we assess the relationship between the aggregate income elasticity of aggregate demand and individual income elasticities of demand. We show that the aggregate elasticity is equal to the mean of individual elasticities plus a covariance term. Consequently, the sign of this covariance term determines whether the aggregate elasticity overestimates or underestimates the mean of indiv...