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Decomposing changes in income risk using consumption data

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  • Richard Blundell
  • Hamish Low
  • Ian Preston

Abstract

This paper concerns the decomposition of income risk into permanent and transitory components using repeated cross-section data on income and consumption. Our focus is on the detection of changes in the magnitudes of variances of permanent and transitory risks. A new approximation to the optimal consumption growth rule is developed. Evidence from a dynamic stochastic simulation is used to show that this approximation can provide a robust method for decomposing income risk in a nonstationary environment. We examine robustness to unobserved heterogeneity in consumption growth and to unobserved heterogeneity in income growth. We use this approach to investigate the growth in income inequality in the UK in the 1980s.

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File URL: http://hdl.handle.net/10.3982/QE44
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Bibliographic Info

Article provided by Econometric Society in its journal Quantitative Economics.

Volume (Year): 4 (2013)
Issue (Month): 1 (03)
Pages: 1-37

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Handle: RePEc:ecm:quante:v:4:y:2013:i:1:p:1-37

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References

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  1. Dirk Krueger & Fabrizio Perri, 2005. "Does income inequality lead to consumption equality? evidence and theory," Staff Report 363, Federal Reserve Bank of Minneapolis.
  2. Sumru Altug & Robert A. Miller, 1987. "Household choices in equilibrium," Working Papers 341, Federal Reserve Bank of Minneapolis.
  3. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers 2345, C.E.P.R. Discussion Papers.
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  5. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
  6. David M. Cutler & Lawrence F. Katz, 1992. "Rising Inequality? Changes in the Distribution of Income and Consumption in the 1980s," NBER Working Papers 3964, National Bureau of Economic Research, Inc.
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  19. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers W04/28, Institute for Fiscal Studies.
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Citations

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Cited by:
  1. Brian Baugh & Itzhak Ben-David & Hoonsuk Park, 2014. "Disentangling Financial Constraints, Precautionary Savings, and Myopia: Household Behavior Surrounding Federal Tax Returns," NBER Working Papers 19783, National Bureau of Economic Research, Inc.
  2. Blundell, Richard & Pistaferri, Luigi & Saporta-Eksten, Itay, 2014. "Consumption inequality and family labor supply," Working Paper Series 1656, European Central Bank.
  3. Carroll, Christopher D., 2009. "Precautionary saving and the marginal propensity to consume out of permanent income," CFS Working Paper Series 2009/16, Center for Financial Studies (CFS).
  4. John Sabelhaus & Samuel Ackerman, 2012. "The effect of self-reported transitory income shocks on household spending," Finance and Economics Discussion Series 2012-64, Board of Governors of the Federal Reserve System (U.S.).
  5. Christopher D. Carroll, 2009. "Theoretical Foundations of Buffer Stock Saving," 2009 Meeting Papers 210, Society for Economic Dynamics.
  6. Bick, Alexander & Choi, Sekyu, 2013. "Revisiting the effect of household size on consumption over the life-cycle," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2998-3011.
  7. repec:ese:iserwp:2012-05 is not listed on IDEAS
  8. Mike Brewer & Cormac O'Dea, 2012. "Measuring living standards with income and consumption: evidence from the UK," IFS Working Papers W12/12, Institute for Fiscal Studies.

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