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Lifecycle Dynamics of Income Uncertainty and Consumption

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  • James Feigenbaum
  • Geng Li

Abstract

We propose a method for estimating household income uncertainty that does not impose restrictions on the underlying income shocks or assumptions about household behaviors. We measure income uncertainty as the variance of linear projection errors at various future horizons, up to 25 years ahead, conditional on only the information available to households when the projection is made. Our uncertainty estimates change substantially over the life cycle. We calibrate an income process to match our estimates, allowing the variances of both transitory and persistent shocks to change over the life cycle. 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 University of Pittsburgh, Department of Economics in its series Working Papers with number 360.

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Date of creation: Jul 2008
Date of revision: Jul 2008
Handle: RePEc:pit:wpaper:360

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Citations

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Cited by:
  1. 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.).
  2. Abe, Naohito & Yamada, Tomoaki, 2009. "Nonlinear income variance profiles and consumption inequality over the life cycle," Journal of the Japanese and International Economies, Elsevier, vol. 23(3), pages 344-366, September.
  3. Emin Gahramanov & Xueli Tang, 2014. "Impatient in Experiments, but Patient in Simulations: A Challenge to a Neoclassical Model," Economics Series 2014_2, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
  4. James Feigenbaum, 2008. "A Nonparametric Characterization of Income Uncertainty over the Lifecycle," Working Papers 359, University of Pittsburgh, Department of Economics, revised Jul 2008.
  5. James A. Feigenbaum & Geng Li, 2010. "A semiparametric characterization of income uncertainty over the life cycle," Finance and Economics Discussion Series 2010-42, Board of Governors of the Federal Reserve System (U.S.).

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