MeasuringconsumptionsmoothinginCEXdata

A newmethodofmeasuringthedegreeofconsumptionsmoothingisproposedand implementedusingdatafromtheConsumerExpenditureSurvey.Thestructureofthis Surveyissuchthatestimatorspreviouslyusedintheliteratureareinconsistent,simply becauseincomeismeasuredannuallyandconsumptionismeasuredquarterly.An AR(1) structureisimposedontheincomeprocesstoobtainaproxyforquarterlyincome throughaprojectiononannualincome.Byconstruction,thisproxygivesrisetoa measurementerrorwhichisorthogonaltotheproxyitself—as opposedtothe unobservedregressor—leadingtoaconsistentestimator.Ourestimatesarecontrasted with theoutputoftwoestimatorsusedintheliterature.Thiscomparisonshowsthat whilethefirst(OLS)estimatortendstooverstatethedegreeofrisksharing,thesecond (IV) estimatorgrosslyunderstatesit