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A semiparametric characterization of income uncertainty over the life cycle

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  • James A. Feigenbaum
  • Geng Li

Abstract

We propose a novel approach to estimate household income uncertainty at various future horizons and characterize how the estimated uncertainty evolves over the life cycle. We measure income uncertainty as the variance of linear forecast errors conditional on information available to households prior to observing the realized income. This approach is semiparametric because we impose essentially no restrictions on the statistical properties of the forecast errors. Relative to previous studies, we find lower and less persistent income uncertainties that call for a life cycle consumption profile with a less pronounced hump.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2010-42.

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Date of creation: 2010
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Handle: RePEc:fip:fedgfe:2010-42

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Related research

Keywords: Income ; Saving and investment ; Consumption (Economics) ; Uncertainty;

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References

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  1. Feigenbaum, James, 2008. "Can mortality risk explain the consumption hump?," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 844-872, September.
  2. Fatih Guvenen, 2007. "Learning Your Earning: Are Labor Income Shocks Really Very Persistent?," American Economic Review, American Economic Association, vol. 97(3), pages 687-712, June.
  3. Luis M. Viceira, 2001. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," Journal of Finance, American Finance Association, vol. 56(2), pages 433-470, 04.
  4. Nir Jaimovich & Henry E. Siu, 2008. "The Young, the Old, and the Restless: Demographics and Business Cycle Volatility," NBER Working Papers 14063, National Bureau of Economic Research, Inc.
  5. Bullard, James & Feigenbaum, James, 2007. "A leisurely reading of the life-cycle consumption data," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2305-2320, November.
  6. Margaret McConnell & Gabriel Perez Quiros, 2000. "Output fluctuations in the United States: what has changed since the early 1980s?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  7. Flavio Cunha & James Heckman & Salvador Navarro, 2005. "Separating uncertainty from heterogeneity in life cycle earnings," Oxford Economic Papers, Oxford University Press, vol. 57(2), pages 191-261, April.
  8. Alessandra Fogli & Fabrizio Perri, 2006. "The Great Moderation and the U.S. External Imbalance," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 24(S1), pages 209-225, December.
  9. 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.
  10. James Feigenbaum & Geng Li, 2008. "Lifecycle dynamics of income uncertainty and consumption," Finance and Economics Discussion Series 2008-27, Board of Governors of the Federal Reserve System (U.S.).
  11. Martin Browning & Thomas F. Crossley, 2001. "The Life-Cycle Model of Consumption and Saving," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 3-22, Summer.
  12. Baker, Michael & Solon, Gary, 1999. "Earnings Dynamics and Inequality Among Canadian Men, 1976-1992: Evidence from Longitudinal Income Tax Records," Analytical Studies Branch Research Paper Series 1999130e, Statistics Canada, Analytical Studies Branch.
  13. Dynan Karen & Elmendorf Douglas & Sichel Daniel, 2012. "The Evolution of Household Income Volatility," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 12(2), pages 1-42, December.
  14. Pierre-Olivier Gourinchas & Jonathan A. Parker, 2002. "Consumption Over the Life Cycle," Econometrica, Econometric Society, vol. 70(1), pages 47-89, January.
  15. James Feigenbaum & Geng Li, 2011. "Household income uncertainties over three decades," Finance and Economics Discussion Series 2011-25, Board of Governors of the Federal Reserve System (U.S.).
  16. James Feigenbaum, 2006. "Precautionary Saving Unfettered," Computing in Economics and Finance 2006 29, Society for Computational Economics.
  17. Gary Hansen & Selahattin Imrohoroglu, 2008. "Consumption over the Life Cycle: The Role of Annuities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 566-583, July.
  18. Storesletten, Kjetil & Telmer, Chris & Yaron, Amir, 2002. "Consumption and Risk Sharing Over the Life Cycle," Seminar Papers 702, Stockholm University, Institute for International Economic Studies.
  19. Chang-Jin Kim & Charles R. Nelson, 1999. "Has The U.S. Economy Become More Stable? A Bayesian Approach Based On A Markov-Switching Model Of The Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 608-616, November.
  20. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
  21. Feigenbaum, James, 2008. "Information shocks and precautionary saving," Journal of Economic Dynamics and Control, Elsevier, vol. 32(12), pages 3917-3938, December.
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