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How Much Do Households Really Know About Their Future Income?

Author

Listed:
  • Swapnil Singh

    (Center for Excellence in Finance and Economic Research (CEFER), Bank of Lithuania)

  • Christian A. Stoltenbergz

    (University of Amsterdam and Tinbergen Institute)

Abstract

We develop a consumption-savings model that distinguishes households’ perceived income uncertainty from income uncertainty as measured by an econometrician. Households receive signals on their future disposable income that can drive a gap between the two uncertainties. With an uncertainty gap that is consistent with direct estimates stemming from subjective income expectations, the model jointly explains three consumption inequality and insurance measures in US micro data that are not captured without the difference: (i) the cross-sectional variance of households’ consumption, (ii) the covariance of current consumption and income growth and (iii) the income-conditional mean of household consumption.

Suggested Citation

  • Swapnil Singh & Christian A. Stoltenbergz, 2018. "How Much Do Households Really Know About Their Future Income?," Bank of Lithuania Working Paper Series 55, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:55
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    References listed on IDEAS

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    More about this item

    Keywords

    Risk sharing; Advance information; Consumption insurance; Endogenous borrowing constraints; Limited commitment;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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