The excess smoothness puzzle in consumption
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The Department of Economic Science was founded in 1898 to teach economic theory as a truth of industrial life, and was very much concerned with applying economics to business and industry, particularly agriculture. Between 1910 and 1967 it showed the growing influence of other social studies, such as sociology, history, and political science. Today it encompasses the majors of Agricultural Business (preparing for agricultural finance and management), Business Economics, and Economics (for advanced studies in business or economics or for careers in financing, management, insurance, etc).
History
The Department of Economic Science was founded in 1898 under the Division of Industrial Science (later College of Liberal Arts and Sciences); it became co-directed by the Division of Agriculture in 1919. In 1910 it became the Department of Economics and Political Science. In 1913 it became the Department of Applied Economics and Social Science; in 1924 it became the Department of Economics, History, and Sociology; in 1931 it became the Department of Economics and Sociology. In 1967 it became the Department of Economics, and in 2007 it became co-directed by the Colleges of Agriculture and Life Sciences, Liberal Arts and Sciences, and Business.
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1898–present
Historical Names
- Department of Economic Science (1898–1910)
- Department of Economics and Political Science (1910-1913)
- Department of Applied Economics and Social Science (1913–1924)
- Department of Economics, History and Sociology (1924–1931)
- Department of Economics and Sociology (1931–1967)
Related Units
- College of Agricultural and Life Sciences (parent college)
- College of Liberal Arts and Sciences (parent college)
- College of Business (parent college)
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Abstract
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.