Testing the Response of Consumption to Income Changes with (Noisy) Panel Data

Joseph G. Altonji, Aloysius Siow
1987 Quarterly Journal of Economics  
This paper tests the rational expectations lifecycle model of consumption against (i) a Keynesian model and (ii) the rational expectations lifecycle model with imperfect capital markets. The tests are based upon the relative responsiveness of consumption to income changes that can be predicted from past information and income changes that cannot he predicted. The tests allow for measurement error in income. The results reject the Keynesian model and generally support the lifecycle model. But
more » ... cycle model. But the results are not sufficiently precise to rule out the possibility that some households are liquidity constrained. Measurement error has a strong influence on the relationship between consumption and income.
doi:10.2307/1885065 fatcat:dcowcwkf4nfvhg35lghnbluktu