Research

Under-Sensitivity and Under-Volatility in Aggregate Consumption Expenditures

This paper derives and tests exact restrictions on the sensitivity of changes in consumption to univariate innovations in labor income. Under the maintained hypothesis that labor income is difference stationary, changes in consumption are shown to be far too insensitive to innovations in labor income to be consistent with the Permanent Income Hypothesis. The under-sensitivity result complements recent work on the under-volatility of consumption. Several potential explanations for under-sensitivity are examined (for example, costly adjustment, unanticipated capital gains) but none is found to be entirely satisfactory.

Publication Information
Article Title: Under-Sensitivity and Under-Volatility in Aggregate Consumption Expenditures
Journal: Journal of Macroeconomics (1991)
v. 13, iss. 1, pp. 1-24
Author(s): Cushing, Matthew J
Researcher Information
    
Cushing, Matthew J
Cushing, Matthew J
Professor of Economics
Expertise:
  • Labor Economics
  • Econometrics
  • Macroeconomics
Economics
CoB 525 U
P.O. Box 880489
University of Nebraska-Lincoln
Lincoln, NE 68588-0489, USA
Phone: (402) 472-2323
Fax: (402) 472-9700
mcushing1@unl.edu