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Inequality over the Business Cycle: Estimating Income Risk using Micro-Data on Consumption

  • Giorgio Primiceri

    (Princeton University)

  • Thijs van Rens

    (Princeton University)

We use CEX repeated cross-section data on consumption and income, to evaluate the nature of increased income inequality in the 1980s and 90s. We decompose unexpected changes in family income into transitory and permanent, and idiosyncratic and aggregate components, and estimate the contribution of each component to total inequality. The model we use is a linearized incomplete markets model, enriched to incorporate risk- sharing while maintaining tractability. Our estimates suggest that taking risk sharing into account is important for the model fit; that the increase in inequality in the 1980s was mainly permanent; and that inequality is driven almost entirely by idiosyncratic income risk. In addition we find no evidence for cyclical behavior of consumption risk, casting doubt on Constantinides and Duffie's (1995) explanation for the equity premium puzzle.

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Paper provided by EconWPA in its series Macroeconomics with number 0212003.

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Length: 51 pages
Date of creation: 10 Dec 2002
Date of revision:
Handle: RePEc:wpa:wuwpma:0212003
Note: Type of Document - Adobe pdf (composed in SWP); prepared on IBM PC; to print on PostScript; pages: 51 ; figures: included. An updated version of this paper may be available at:
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