Sooner or later? The impact of child education on household consumption

We study the impact of one more year of child’s education on household (non-durable) consumption. We exploit an exogenous shock generated by a university reform in Italy in the early 2000s. We find that families responded in a way that is consistent with education as a production good. The higher child’s education produced household positive, permanent income innovations. Hence, family non-durable consumption increased. Our findings suggest that education can be an insurance device against adverse permanent income shocks. The 2001 reform not only positively affected offspring’s years of schooling, but it also had a positive effect to boost household consumption.

Are Temporary or Permanent Income Payments Better Placed to Boost Demand during Covid-19?

Covid-19 has sparked calls for a universal basic income as a way of coping with a demand shock caused by the pandemic. Temporary income payments have been part of the emergency response to the pandemic. This paper questions the effectiveness of temporary payments as a way to raise demand. Some observers claim that vouchers are better targeted at sectors hit hard by Covid-19 as people may have a tendency to save than spend from temporary payments. There may be a stronger case for permanent rather than temporary payments if the aim is to boost demand in the economy.

The Impact of Covid-19 on The Effect Multiplier on The Household Consumption Function in Jakarta

The purpose of this study is to examine the effect of a decrease in aggregate income, due to activity restrictions during the Covid-19 pandemic, on household consumption expenditure in Jakarta. The research model is based on the Absolute and Permanent income hypothesis, to see the long-term and short-term effects of changes in income on consumption expenditure. The research method is quantitative by using annual data on consumption expenditure and income at current prices for the period 2003 to 2020. The analysis model uses OLS and ECM regression. The results showed that income has a significant effect on the equation of the short-run and long-run consumption function. The short-term income crisis has an impact on the increase in the multiplier coefficient. In the short term there will also be an adjustment in consumption expenditures, according to what is postulated in the permanent income hypothesis. This indicates that in the short term expansionary fiscal policy is effective in increasing aggregate household consumption expenditure. Further research suggests adding the inflation variable as a proxy for economic conditions. Keywords: Absolute Income Hypothesis, Permanent Income Hypothesis, Household Consumption Expenditures, National Income, Multiplier.

Testing for structural break in aggregated consumption function of Russian households

The paper considers a simple aggregated consumption function for Russian economy in which households consume a constant fraction of a permanent income. The value of this fraction is estimated by households within the framework of the adaptive expectations process based on the dynamics of GDP at constant consumption prices. Testing for a structural break at an unknown date in the parameter of the propensity to consume is performed. The results of econometric estimation, taking into account the presence of an endogeneity in the regression equation, demonstrate that after 2014 there was a structural break, as a result of which the parameter of the propensity to consume of permanent GDP decreased by 6.5—9.2%.

Essays on inequality and mobility of Korean households' income and consumption

This dissertation analyzes income and consumption inequality empirically and theoretically using Korean Labor and Income Panel Study (KLIPS). This dissertation consists of three chapters. First two chapters are about detrended income and consumption excluding the effects of household's characteristics. Third chapter is about observed income and consumption. In the chapters 1 and 2, we track income and consumption of same cohort of Korean households over the lifecycle and find empirical evidences are not explained by existing income and consumption models with iid assumption of income shocks. For example, future cumulative gains in consumption (income) are negatively correlated with initial consumption (income). Second, consumption inequality does not grow over the lifecycle. At the chapter 1, we develop new income process model. Our suggesting generalized restricted income profiles (G-RIP) and stochastic heterogeneous income profile (SHIP) consider iid income shocks as well as household-specific factors of macroeconomy. We find that the estimated model fits the dynamics of inequalities and mobility of income better than the conventional RIP or HIP models. At the chapter 2, we develop new consumption process model. New consumption model has consumption shocks as well as household-specific uncertainty. Therefore, consumption risk is correlated with past consumption, which can explain the observed consumption moments. Our suggesting heterogeneous conditional mean (HCM) model fits the dynamics of inequalities and mobility of income and consumption better than the conventional model that assume iid income shocks. At the chapter 3, we deal with non-classical measurement errors in consumption using a double-differencing correction method. Aguiar and Bils (2015) develop a double differencing correction method to estimate the relative consumption inequality adjusted for measurement errors. In the first step they estimate Engel curve which measurement errors are correlated with error terms of and use current income as an instrument for total expenditure. This chapter provides an alternative instrument based on the permanent income hypothesis (PIH) for total expenditure. A long panel data is required to capture a household's permanent income and using a Korean household panel allows to test a hypothesis that permanent income could be more appropriate instrument than current income. We find the expected lifecycle income is better instrument than current income for current consumption.

Dynastic Precautionary Savings

This article documents that parents accumulate savings to insure their children against income risk. I refer to this behaviour as dynastic precautionary saving. Using a sample of matched parent–child pairs from the Panel Study of Income Dynamics, I test for dynastic precautionary savings by examining the response of parental consumption to the child’s permanent income uncertainty. I exploit variation in permanent income risk across age and industry–occupation groups to confirm that, all else equal, higher uncertainty in the child’s permanent income depresses parental consumption, indicating a precautionary saving motive across generations.

Double-Counting of Investment*

The national-income accounts double-count investment, which enters once when it occurs and again in present value as rental income on added capital. The double-counting implies that GDP and national income overstate sustainable consumption. An alternative measure, ‘permanent income,’ equals consumption in the steady state but deviates from consumption outside of the steady state because expensing of gross investment applies to the long-run flow, not the current value. The permanent-income perspective substantially affects measured factor-income shares. When computed in relation to permanent income, the U.S. labor-income share has been reasonably stable, in contrast to the declining share based on GDP.