Estimating Household Consumption Insurance

Abstract

Blundell, Pistaferri, and Preston (American Economic Review, 2008, 98(5), 1887-1921) report an estimate of household consumption insurance with respect to permanent income shocks of 36%. Their estimate is imprecise and not robust to weighting scheme for GMM. We propose instead to use quasi maximum likelihood estimation (QMLE). It produces a more precise and significantly higher estimate of consumption insurance at 55%. For sub-groups by age and education, the differences between estimates are even more pronounced. Monte Carlo experiments with non-Normal shocks demonstrate that QMLE is more accurate than GMM.