Further evidence of excess sensitivity of consumption?. Non-separability among goods and heterogeneity across households

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Alegre, Joaquín; Pou, Llorenç

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Abstract	The standard theoretical framework for analysing households’ intertemporal decisions is the life-cycle/permanent income model. Among its implications, testing the model allows to analyse the response of consumption to fiscal policy. However, the empirical literature with microdata has yielded mixed results. This paper examines the sensitivity of the results to the assumption of separability among goods and of homogeneity across households. For that purpose, we test a rational expectations permanent income model with household data drawn from the Spanish Family Expenditure Survey. This survey contains detailed information on total expenditure, and the income presents large, exogenous quarterly changes due to an institutional feature. The paper shows that assuming separability among commodities biases the test against the model. When separability is not imposed, we show that the rejection of the model depends on heterogeneity across households in terms of their members being unemployed or not. For those households permanently employed, the model cannot be rejected whatever their income status.
Sprache Dokument	Englisch
Publikationsjahr	2008
Seitenangabe	S. 931-948
Zeitschriftentitel	Applied Economics, 40 (2008) 7
DOI	http://dx.doi.org/10.1080/00036840600749896
Status	Postprint; begutachtet (peer reviewed)
Lizenz	PEER Licence Agreement (applicable only to documents from PEER project)