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Campbell & Mankiw (1989)

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Campbell & Mankiw (1989)

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Hsieh (2003)

400 THE AMERICAN ECONOMIC REVIEW MARCH 2003

TABLE 2—RESPONSE OF CONSUMPTION TO ALASKA PFD

dlog(Nondurable dlog(Durable
consumption) consumption)
(1) (2) (3) (4) (5) (6)
PFD t " Family Size h 0.0002 !0.0167 !0.0034 !0.1659 !0.1741 !0.1488
Family Income h (0.0324) (0.0336) (0.0328) (0.0878) (0.0916) (0.0890)
Controls for:
Family size No No Yes No No Yes
Year dummies No Yes No No Yes No
Number of observations 806 806 806 806 806 806

Notes: Dependent variable is log(C IV /C III ). Standard errors are in parentheses. All regres-
sions are ordinary least squares (OLS) and include a quadratic in age and changes in the
number of children and adults in the household.

quarterly income, and z contains variables for typical household in my sample by slightly
changes in the number of adults, number of more than 20 percent (see Table 1), the point
children, and a second-order polynomial in age estimate of the elasticity of nondurable con-
of the head of the household to capture the fact sumption suggests that the Permanent Fund
that household consumption is generally not flat payments increased household consumption by
over the life cycle. The amount of the payment 0.004 percent (roughly 4 cents) in the fourth
received by each household is calculated as the quarter of the year. 5/5
product of PFD and family size. The main in- The estimate in the basic specification in the
dependent variable is the percentage increase in first column is identified both by differences in
a household’s income in the fourth quarter due the size of the payment across time and across
to payments from the Permanent Fund, and the families of different sizes. The second column
key parameter of interest is !1 which measures in Table 2 controls for year effects and thus
the elasticity of consumption to household in- identifies the effect of the Permanent Fund only
come. The dependent variable is the change in from the cross-sectional variation in family size.
household consumption (in logs) from the third Although one should interpret these estimates
quarter to the fourth quarter of the year. As with caution since there are clearly reasons to
previously mentioned, Alaskan residents re- expect the seasonal pattern of consumption to
ceived their dividend payments in the fourth quar- differ between families of different sizes, the
ter of the year. Under the certainty-equivalent point estimate of the elasticity of consumption
version of the LC/PIH (or a version of the is still essentially zero. The specification in the
LC/PIH in which the expected variance of con- third column controls for family size and thus
sumption is constant), !1 should be equal to only uses the variation across time in the
zero. amount of the payment to identify the consump-
The first column in Table 2 presents the re- tion effects of the dividend payments. Once
sults of the first set of excess sensitivity tests for again, one should be cautious in interpreting
nondurable consumption.10 The point estimate these numbers, since the seasonal pattern of
of !1 is positive, but economically and statisti- consumption may have changed over time.
cally insignificant; it indicates that a 10-percent Nonetheless, the point estimate of the income
increase in household income increases con- elasticity of consumption is still economically
sumption by 0.002 percent. Since the dividend and statistically insignificant.
payments increased the quarterly income of the The last three columns in Table 2 present
estimates of the response of expenditures on
durables to the Permanent Fund payments using
10
All the regressions also include a constant. I do not use
the three excess sensitivity tests. The coefficient
the CEX’s sampling weights, although the results are vir- estimates are small but marginally significant.
tually identical if the weights are used. Surprisingly, the point estimates indicate that