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Lifecycle Dynamics of Income Uncertainty and Consumption

  • James Feigenbaum
  • Geng Li

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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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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