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Household income uncertainties over three decades

  • James Feigenbaum
  • Geng Li

We study the trend in household income uncertainty using a novel approach that measures income uncertainty as the variance of forecast errors at each future horizon separately without imposing parametric restrictions on the underlying income shocks. We find that household income uncertainty has risen significantly and persistently since the early 1970s. For example, our measure of near-future uncertainty in total family non-capital income rose about 40 percent between 1971 and 2002. This rising uncertainty is likely due to the increase in variances of both persistent and transitory income shocks. Although the increase in uncertainty was widespread, the increase was most pronounced among single-earner households and high-income households. A parsimoniously calibrated Aiyagari (1994) model is solved to illustrate how rising income uncertainty affects aggregate saving.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2011-25.

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Date of creation: 2011
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Handle: RePEc:fip:fedgfe:2011-25
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  13. 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.
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