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Unformatted text preview: ECON1002: Applied Economics Exercise 5: Consumption/Saving and Diff-in-diffs Answers to question 1 must be handed in. Hand in to ECON 1002 coursework box in Student Common Room (basement, Drayton House) by midday on Thursday 19th March 2009. 1. * The data for this question can be found in the file cexp.dta. The variables relate to the UK over the period 1969-1984. (a) Permanent income can be thought of as the average amount of resources that an individual expects to have available for consumption each year during the rest of her life. Suppose consumers expenditure C t in period t is related to perceptions of permanent income Y P t in period t according to C t = + Y P t and suppose that consumers update their perceptions of permanent income according to the rule Y P t- Y P t- 1 = ( Y t- Y P t- 1 ) + t which implies that Y P t = Y t + (1- ) Y P t- 1 + t where Y t is actual disposable income and t is a random error term reflecting new information on future incomes. Show that C t = + (1- ) C t- 1 + Y t + t and use the data to estimate such an equation by OLS. How sensitive to current income do perceptions of permanent income seem to be? What is your estimate of the marginal propensity to consume out of permanent income,...
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- Spring '09