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Micro Data For Macro Models

Spring 2011

Notes 1

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(Weeks 1 and 2)

Personal Savings Rates Over Time

Potential Empirical Strategies?

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Think Broadly – Lets not be constrained by actual data (yet)

Now Lets Think About Existing Data

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What data exists?o

What data easily exists?

What are the limitations of these data?

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What data conceivably exists?

Goals of My Course

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Get you thinking about how to conduct empirical research of interest to abroad set of constituents (macroeconomists, labor economists, publiceconomists, etc.)

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I am going to do that by introducing you to a models and literature

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focusing on household financial behavior including work on:consumption saving inequality housing labor supply entrepreneurshipconsumption, saving, inequality, housing, labor supply, entrepreneurship,default, etc.

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Discuss existing data sets that can shed light on this question

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Discuss existing data sets that can shed light on this question.

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Focus on papers that have had big impacts on the respective literatures –

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nearly all of which could have been written by anyone in this class (withyour existing skill sets).

One Other Note

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What makes a great economists (or great economics paper)?

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There are many paths

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Nearly all, however, succeed with creativity (along some dimension).

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Usually, the true innovations in the paper are much simpler (in bothmodel and data work) than the work that follows.

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All of them grounded in fundamentals of economics (incentives,supply, demand, utility maximization, cost-benefit analysis, profitmaximization, etc.)

Topic 1:

The Evolution of Consumption Inequality

Subtitle:

Can we trust expenditure data in the Consumer

Expenditure Survey?

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“Does Income Inequality Lead to Consumption Inequality: Evidence and

Theory” (Krueger and Perri, 2005)Theory

(Krueger and Perri, 2005)

“Has Consumption Inequality Mirrored Income Inequality” (Aguiar and

Bils, 2011)

Income and Consumption Inequality

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Large literature documenting the increase in income inequality within theU.S. during the last 30 years (Katz and Autor, 1999)

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Consumption is a better measure of well being than income (utility is U(C)not U(Y))not U(Y)).

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Does income inequality imply consumption inequality?

Depends on whether income inequality is “permanent”Depends on insurance mechanisms available to householdsDepends on other margins of substitution (home production, femalelabor supply, etc.).

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Kevin Murphy’s Web Page

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Why Do We Care About Consumption Inequality?

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Why is it important? o^

Learn about well being over time (economic growth, standard oflivings, inequality, etc.). o^

Learn about insurance mechanisms available to households (publicinsurance, private insurance, etc.)? o^

Learn about the nature of income processes (more on this in thenext set of lecture notes).

Krueger and Perri (2005): What They Find

Krueger and Perri (2005): What They Find

Krueger and Perri (2005): What They Conclude

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Conclusions o^

Income inequality is much greater than consumption inequality o^

If some of the increase in income inequality is idiosyncratic o^

If some of the increase in income inequality is idiosyncratic,households can self insure (or public sector can provide insurance)making consumption inequality respond less than income inequality. o^

Write down a model where insurance is endogenously provided.Increasing idiosyncratic shocks to income can increase demand forinsurance (leading to more insurance)

Consistent with their model

insurance (leading to more insurance).

Consistent with their model,

credit card access increased during this period.B^

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Bottom line:

Use the consumption data to learn about the natureof income processes and insurance mechanisms.

A Caveat – Some Data Issues