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Consumption Inequality, Income Uncertainty and Insurance


  • Luigi Pistaferri
  • Richard Blundell
  • Ian Preston


This paper uses panel data on household consumption and income to describe the transmission of income inequality into consumption inequality. We do this by contrasting shifts in the cross-sectional distribution of income growth with shifts in the cross-sectional distribution of consumption growth. Our aim is to evaluate the time series pattern of permanent income inequality and to assess the degree of insurance. We combine panel data on income from the PSID with consumption data from repeated CEX cross-sections. The results point to some partial insurance but reject the complete market restrictions. We find a greater degree of insurance for transitory shocks and differences in the degree of insurance over time and across demographic groups. We also document the importance of durables and of taxes and transfers as a means of insurance

Suggested Citation

  • Luigi Pistaferri & Richard Blundell & Ian Preston, 2004. "Consumption Inequality, Income Uncertainty and Insurance," 2004 Meeting Papers 215, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:215

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    References listed on IDEAS

    1. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2002. "Money, Interest Rates, and Exchange Rates with Endogenously Segmented Markets," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 73-112, February.
    2. Ricardo Lagos & Randall Wright, 2005. "A Unified Framework for Monetary Theory and Policy Analysis," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 463-484, June.
    3. Lacker, Jeffrey M., 2004. "Payment system disruptions and the federal reserve following September 11, 2001," Journal of Monetary Economics, Elsevier, vol. 51(5), pages 935-965, July.
    4. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-864, November.
    5. Shi Shougong, 1995. "Money and Prices: A Model of Search and Bargaining," Journal of Economic Theory, Elsevier, vol. 67(2), pages 467-496, December.
    6. Fernando Alvarez & Andrew Atkeson & Chris Edmond, 2003. "On the Sluggish Response of Prices to Money in an Inventory-Theoretic Model of Money Demand," NBER Working Papers 10016, National Bureau of Economic Research, Inc.
    7. Aleksander Berentsen & Gabriele Camera & C hristopher W aller, 2005. "The Distribution Of Money Balances And The Nonneutrality Of Money," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(2), pages 465-487, May.
    8. Grossman, Sanford & Weiss, Laurence, 1983. "A Transactions-Based Model of the Monetary Transmission Mechanism," American Economic Review, American Economic Association, vol. 73(5), pages 871-880, December.
    9. Gomis-Porqueras, Pere & Smith, Bruce D., 2003. "Seasonality And Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 7(04), pages 477-502, September.
    10. Satyajit Chatterjee, 1997. "On the optimality of eliminating seasonality in nominal interest rates," Working Papers 97-2, Federal Reserve Bank of Philadelphia.
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    Cited by:

    1. Madden, D., 2000. "Was Ireland Better Off in 1994 than in 1987?," Papers 00/11, College Dublin, Department of Political Economy-.
    2. Stéphane Bonhomme & Jean-Marc Robin, 2009. "Assessing the Equalizing Force of Mobility Using Short Panels: France, 1990-2000," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 63-92.
    3. Leonardi, Marco, 2003. "Earnings Instability of Job Stayers and Job Changers," IZA Discussion Papers 946, Institute for the Study of Labor (IZA).
    4. Giovanni Gallipoli & Laura Turner, 2009. "Household Responses to Individual Shocks: Disability and Labor Supply," Working Papers 2009.97, Fondazione Eni Enrico Mattei.
    5. Anders Forslund & Oskar Nordström Stans, 2006. "Swedish Youth Labour Market Policies Revisited," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 75(3), pages 168-185.

    More about this item


    Consumption Dynamics; Income Shocks; Inequality; Insurance;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General


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