Orazio Attanasio

Is Consumption Growth Consistent with Intertemporal Optimization? Evidence from the Consumer Expenditure Survey

In this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in U.S. household-level data. We propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations. We estimate preference parameters using the only U.S. micro data set with complete consumption information. We show that previous rejections can be explained by the simplifying assumptions made in previous studies. We also show that results obtained using good consumption or aggregate data can be misleading.

Consumption growth, the interest rate and aggregation

In this paper we present empirical evidence on aggregation problems with Euler equations for consumption. Our main results are: estimates of the elasticity of intertemporal substitution for consumption are consistently lower for aggregate data than for average cohort data and the theoretical model is statistically rejected on aggregate data, not rejected on average cohort data. In trying to explain these differences we find that a major role is played by the non-linearity of the estimable equation and by omitted demographic factors (normally unobservable on aggregate data). However, even when these sources of aggregation bias are corrected for, the estimates of the elasticity of intertemporal substitution obtained from aggregate data remain lower than those obtained from average cohort data, and excess sensitivity tests reject the implications of the model. This can be explained as the result of imposing identical coefficients to cohorts who differ in preferences and/or opportunity sets.

Relative Wage Movements and the Distribution of Consumption

We analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare. Our empirical work draws on the best available cross-sectional data sets to construct synthetic panel data on U.S. consumption, labor supply, and wages during the 1980s. We find that low-frequency movements in the cohort-education structure of pretax hourly wages among men drove large changes in the distribution of household consumption. The results constitute a spectacular failure of between-group consumption insurance, a failure not explained by existing theories of informationally constrained optimal consumption behavior. A welfare analysis indicates that the cost of between-group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude.

Stock-Market Participation, Intertemporal Substitution, and Risk-Aversion

Many of the empirical rejections of the consumption CAPM can be explained by the fact that the marginal rate of substitution between present and future consumption, which in the standard model functions as the pricing kernel for all assets for which a consumer is not at a corner, seems to vary too little to be consistent with sensible values of the parameters. Moreover, when one considers more than one asset at a time, one typically gets strong rejections of the overidentifying restrictions implied by the model. The failure seems to be both in terms of unconditional and conditional moments. Two recent papers Attanasio et al., 2002 [henceforth ABT]; Vissing-Jorgensen, 2002 [henceforth VJ] have shown that, if one focuses on the consumption of individuals participating in the stock market, one does not reject some implications of the model. In particular, both VJ and ABT find that, using the consumption of stockholders, conditional Euler equations lead to sensible preference parameters and, in the case of ABT, fail to reject the overidentifying restrictions even when considering two assets (stocks and bonds) at the same time. While these results constitute a first empirical success, they do not necessarily constitute a solution to the equity premium puzzle. As argued by Robert E. Hall (1988) and Attanasio and Guglielmo Weber (1989), the estimates of the coefficient on the interest rate in a loglinearized Euler equation should be interpreted as the elasticity of intertemporal substitution (EIS) and can only be informative about the degree of risk-aversion under more restrictive assumptions (CRRA utility). In this paper we argue that considering the consumption growth of stockholders and two asset returns not only yields values of the EIS that are plausible, but also helps explain the equity premium puzzle. The evidence we have on the consumption, income, and portfolios of stockholders is consistent with fairly plausible values of the coefficient of relative risk-aversion when using the preference specification of Larry G. Epstein and Stanley E. Zin (1991). We use three Euler equations, one for each of the two assets considered, and one for the household’s total wealth portfolio, whose return will be denoted as Rm. Rm is, in principle, an unobservable variable in that it depends on the returns on all assets an individual consumer holds, including human capital. In this paper, we specify the conditional expected return to human capital as a linear function of the conditional expected returns to stocks and bonds. We suggest a novel approach to estimating the coefficients in this function based on conditional Euler equations for stockholders with two asset returns on the right-hand side. Then, considering unconditional moments, we estimate the risk-aversion of stockholders using the log-linearized equation for the equity premium from Epstein-Zin utility also explored by John Y. Campbell (1996). Unlike Campbell, our preferred approach does not substitute out consumption. Furthermore, we emphasize the importance of allowing for bonds in households’ portfolios as well as not restricting the conditional expected human-capital return to equal that of stocks.

Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries

This paper provides a descriptive analysis of the long- and short-run correlations among saving, investment, and growth rates for 123 countries over the period 1961-94. Three results are robust across data sets and estimation methods: i) lagges saving rates are positively related to investment rates; ii) investment rates Granger cause growth rates with a negative sign; iii) growth rates Granger-cause investment with a positive sign.

Education choices in Mexico: using a structural model and a randomized experiment to evaluate Progresa

In this paper we evaluate the effect of a large welfare program in rural Mexico. For such a purpose we use an evaluation sample that includes a number of villages where the program was not implemented for evaluation purposes. We estimate a structural model of education choices and argue that without such a framework it is impossible to evaluate the effect of the program and, especially, possible changes to its structure. We also argue that the randomized component of the data allows us to identify a more flexible model that is better suited to evaluate the program. We find that the program has a positive effect on the enrollment of children, especially after primary school. We also find that an approximately revenue neutral change in the program that would increase the grant for secondary school children while eliminating for the primary school children would have a substantially larger effect on enrollment of the latter, while having minor effects on the former. ∗This paper has benefitted from valuable comments from Gary Becker, Esther Duflo, Jim Heckman, Hide Ichimura, Paul Schultz, Miguel Székely, Petra Todd and many seminar audiences. Responsibility for any errors is ours. †UCL, IFS and NBER. ‡UCl and IFS §UCL and Sedesol

Consumption smoothing in island economies : can public insurance reduce welfare?

Abstract In this paper we study the effects of certain types of public compulsory insurance arrangements for aggregate shocks on private allocations in environments with limited commitment. We show that this type of insurance can improve the wellbeing of private situations, but it can also deteriorate it. We also describe how different characteristics of the environment affect the role of public insurance. Using data on the Mexican PROGRESA program, we document the impact that some government programs have in crowding out private transfers.

Intertemporal substitution, risk aversion and the Euler Equation for consumption

This paper investigates the empirical performance of intertemporal optimization models that relax the restriction imposed by expected utility that risk aversion and intertemporal substitution are negatively related. The authors estimate a system of rates of return and consumption growth equations, and interpret their results in the light of the expected utility, the ordinal certainty equivalence, and the Kreps and Porteus (1978) models. Their results are based on average cohort data for consumption, and thus should not reflect births or deaths. They suggest that non-expected-utility models afford major efficiency gains in the estimation of the elasticity of intertemporal substitution by providing simple cross-equation restrictions. Copyright 1989 by Royal Economic Society.

The UK Consumption Boom of the Late 1980s: Aggregate Implications of Microeconomic Evidence

Two competing explanations of the UK consumer boom in the late 1980s are the financial liberalization-imperfect housing market hypothesis of Muellbauer and Murphy and the hypothesis of King. We use 15 years of Family Expenditure Surveys, and cohort analysis, to investigate to what extent these two hypotheses agree with observed changes in consumption patterns. We find that the housing markets explanation accounts for much of the increase by older cohorts, but cannot be reconciled with the marked rise in expenditure levels of younger households. A simple simulation exercise shows instead that the expectations hypothesis can generate increases of expenditure by young consumers of the magnitude observed in our data. Copyright 1994 by Royal Economic Society.

Social Security and Households' Saving

This paper provides new evidence on the substitutability between private and pension wealth by exploiting the Italian pension reform of 1992. We use a difference-in-difference estimator that exploits the differential effects of the reform on individuals belonging to several year-of-birth cohorts and different occupational groups. We find convincing evidence that saving rates increase as a result of a reduction in pension wealth. By allowing for the possibility that substitutability changes with age, we find that substitutability is particularly high (and precisely estimated) for workers between 35 and 45.