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Full Information Estimation of Household Income Risk and Consumption Insurance

Author

Listed:
  • Arpita Chatterjee

    (UNSW Business School, UNSW)

  • James Morley

    (University of Sydney)

  • Aarti Singh

    (University of Sydney)

Abstract
Blundell, Pistaferri, and Preston (2008) report an estimate of household consumption insurance with respect to permanent income shocks of 36%. Their estimate is distorted by an error in their code and is not robust to weighting scheme for GMM. We propose instead to use quasi maximum likelihood estimation (QMLE), which produces a more precise and significantly higher estimate of consumption insurance at 55%. For sub-groups by age and education, differences between estimates are even more pronounced. Monte Carlo experiments with non-Normal shocks demonstrate that QMLE is more accurate than GMM, especially given a smaller sample size.

Suggested Citation

  • Arpita Chatterjee & James Morley & Aarti Singh, 2019. "Full Information Estimation of Household Income Risk and Consumption Insurance," Discussion Papers 2019-07, School of Economics, The University of New South Wales.
    • Handle: RePEc:swe:wpaper:2019-07
    as

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    File URL: http://research.economics.unsw.edu.au/RePEc/papers/2019-07.pdf
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    References listed on IDEAS

    as
    1. Taisuke Nakata & Christopher Tonetti, 2015. "Small sample properties of Bayesian estimators of labor income processes," Journal of Applied Economics, Universidad del CEMA, vol. 18, pages 121-148, May.
    2. Primiceri, Giorgio E. & van Rens, Thijs, 2009. "Heterogeneous life-cycle profiles, income risk and consumption inequality," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 20-39, January.
    3. Altonji, Joseph G & Segal, Lewis M, 1996. "Small-Sample Bias in GMM Estimation of Covariance Structures," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(3), pages 353-366, July.
    4. Adrien Auclert, 2019. "Monetary Policy and the Redistribution Channel," American Economic Review, American Economic Association, vol. 109(6), pages 2333-2367, June.
    5. White, Halbert, 1982. "Maximum Likelihood Estimation of Misspecified Models," Econometrica, Econometric Society, vol. 50(1), pages 1-25, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    consumption insurance; weighting schemes; quasi maximum likelihood;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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