The excess smoothness puzzle in consumption

dc.contributor.advisor Barry L. Falk Lee, Taeyol
dc.contributor.department Economics 2018-08-23T03:18:51.000 2020-06-30T07:05:07Z 2020-06-30T07:05:07Z Fri Jan 01 00:00:00 UTC 1993 1993
dc.description.abstract <p>This paper discusses the "excess smoothness" puzzle which means that permanent income is more volatile than consumption. There have been two major explanations of this puzzle. One is that the existence of excess sensitivity spreads the effect of a permanent income innovation over multiple periods. The other is that a significant transitory income component which is independent with permanent income implies a much smoother permanent income than a univariate labor income process predicts;Two questions are suggested. The first one is whether excess smoothness is an independent phenomenon of excess sensitivity. Quah (1990) indicates that the existence of a transitory component of labor income can resolve this puzzle. However, this paper criticizes this by arguing that his idea implies too small a covariance between the first differences of observed consumption and labor income;The second question is that there is significant difference in measured volatility of permanent income between when a simple ARIMA representation of labor income process is applied to Flavin's permanent income and when a nonparametic approach is applied to Gali's alternative formulation. This paper constructs a general model which embodies not only the two formulations of permanent income but also the existence of excess sensitivity and bivariate labor income process which have been suggested as possible explanations for excess smoothness;From empirical analysis, we conclude that these factors can not explain the difference between the two formulations. The transitory component of labor income does not significantly decrease the volatility of Flavin's permanent income, and excess sensitivity probably can not fully explain excess smoothness.</p>
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dc.identifier archive/
dc.identifier.articleid 11471
dc.identifier.contextkey 6404722
dc.identifier.s3bucket isulib-bepress-aws-west
dc.identifier.submissionpath rtd/10472
dc.language.iso en
dc.source.bitstream archive/|||Fri Jan 14 18:21:30 UTC 2022
dc.subject.disciplines Economics
dc.subject.keywords Economics
dc.title The excess smoothness puzzle in consumption
dc.type article
dc.type.genre dissertation
dspace.entity.type Publication
relation.isOrgUnitOfPublication 4c5aa914-a84a-4951-ab5f-3f60f4b65b3d dissertation Doctor of Philosophy
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