DP1289 Explaining Consumption: A Simple Test of Alternative Hypotheses

Author(s): Tamim Bayoumi
Publication Date: December 1995
Keyword(s): Consumption, Liquidity Constraints, Optimal Debt Target
JEL(s): D12, E21
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1289

A method of testing the relative importance for consumption of full insurance behaviour and changes in income is proposed and estimated using data across Canadian provinces. The focus of the estimation is less on whether or not the full insurance model can be rejected than on how much each of these hypotheses can contribute to explaining overall variation in consumption. Both types of behaviour are found to be statistically significant, but the full insurance model is found to explain considerably more of the growth in consumption than changes in income do.