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Income variance dynamics and heterogenity

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Author Info
Costas Meghir () (Institute for Fiscal Studies and University College London)
Luigi Pistaferri

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Abstract

Recent theoretical work has shown the importance of measuring microeconomic uncertainty for models of both general and partial equilibrium under imperfect insurance. In this paper the assumption of i.i.d. income innovations used in previous empirical studies is removed and the focus of the analysis placed on models for the conditional variance of income shocks, that is related to the approporiate measure of risk emphasized by the theory. We first discriminate amongst various models of earnings determination that separate income shocks into idiosyncratic transitory and permanent components. We allow for education-specific differences in the stochastic process for earnings and for measurement error. The conditional variance of the income shocks is then modelled as a parsimonious autoregressive process with both observable and unobserved heterogeneity. The empirical analysis is conducted on data drawn from the 1967-1991 Panel Study of Income Dynamics.

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Paper provided by Institute for Fiscal Studies in its series IFS Working Papers with number W01/07.

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Length: 53 pp
Date of creation: Apr 2001
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Handle: RePEc:ifs:ifsewp:01/07

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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