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Testing full consumption insurance in the frequency domain

By Paulo Santos-Monteiro

Abstract

Full consumption insurance implies that consumers are able to perfectly share risk by equalizing state by state their inter-temporal marginal rates of substitution in the presence of idiosyncratic endowment shocks. In this paper I test the implications of full consumption insurance using band spectrum regression methods. I argue that moving to the frequency domain provides a possible solution to many difficulties tied to tests of perfect risk sharing. In particular, it provides a unifying framework to test consumption smoothing, both over time and across states of nature. Full consumption insurance is soundly rejected at business cycle frequencies

Topics: HB
Publisher: University of Warwick, Department of Economics
Year: 2008
OAI identifier: oai:wrap.warwick.ac.uk:1343

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