Full Information Estimation of Household Income Risk and Consumption Insurance

We develop a panel unobserved components model of household income and consumption that can be estimated using full information methods. Maximum likelihood estimates for a simple version of this model suggests similar income risk, but higher consumption insurance relative to the partial information moments-based estimates in Blundell, Pistaferri, and Preston (2008) for the same panel dataset. Bayesian model comparison supports this simple version of the model that only allows a spillover from permanent income to permanent consumption, but assumes no cointegration and no persistence in transitory components. However, consumption insurance and income risk estimates are highly robust across different specifications.