Heterogeneous life-cycle profiles, income risk and consumption inequality

Giorgio E. Primiceri; Thijs van Rens

doi:10.1016/j.jmoneco.2008.10.001

Heterogeneous life-cycle profiles, income risk and consumption inequality

Giorgio E. Primiceri, Thijs van Rens^*

^*Corresponding author for this work

Economics

Research output: Contribution to journal › Article › peer-review

48 Scopus citations

Abstract

Was the increase in income inequality in the US due to permanent shocks or merely to an increase in the variance of transitory shocks? The implications for consumption and welfare depend crucially on the answer to this question. We use Consumer Expenditure Survey (CEX) repeated cross-section data on consumption and income to decompose idiosyncratic changes in income into predictable life-cycle changes, transitory and permanent shocks and estimate the contribution of each to total inequality. Our model fits the joint evolution of consumption and income inequality well and delivers two main results. First, we find that permanent changes in income explain all of the increase in inequality in the 1980s and 1990s. Second, we reconcile this finding with the fact that consumption inequality did not increase much over this period. Our results support the view that many permanent changes in income are predictable for consumers, even if they look unpredictable to the econometrician, consistent with models of heterogeneous income profiles.

Original language	English (US)
Pages (from-to)	20-39
Number of pages	20
Journal	Journal of Monetary Economics
Volume	56
Issue number	1
DOIs	https://doi.org/10.1016/j.jmoneco.2008.10.001
State	Published - Jan 2009

Funding

This paper was prepared for the April 2008 Carnegie-Rochester Conference on Public Policy. We are grateful to Pierre-Olivier Gourinchas and Jonathan Parker for many helpful discussions and to Richard Blundell, Chris Carroll, Guido Lorenzoni, Alberto Martin, Claudio Michelacci, Josep Pijoan-Mas, Chris Telmer, our discussants Miklós Koren, Michele Pellizzari and especially Jonathan Heathcote, and the editor Mark Bils for helpful suggestions. Thijs van Rens gratefully acknowledges financial support from the Spanish Ministry of Education and Science (Grants Juán de la Cierva, SEJ2005-01124 and SEJ2006-02235); the Generalitat de Catalunya, DURSI (Grants Beatriu de Pinós and 2005SGR00490) and the Barcelona GSE Research Network.

Keywords

Consumption
Heterogeneity
Incomplete markets
Inequality
Risk

ASJC Scopus subject areas

Finance
Economics and Econometrics

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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10.1016/j.jmoneco.2008.10.001

Cite this

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abstract = "Was the increase in income inequality in the US due to permanent shocks or merely to an increase in the variance of transitory shocks? The implications for consumption and welfare depend crucially on the answer to this question. We use Consumer Expenditure Survey (CEX) repeated cross-section data on consumption and income to decompose idiosyncratic changes in income into predictable life-cycle changes, transitory and permanent shocks and estimate the contribution of each to total inequality. Our model fits the joint evolution of consumption and income inequality well and delivers two main results. First, we find that permanent changes in income explain all of the increase in inequality in the 1980s and 1990s. Second, we reconcile this finding with the fact that consumption inequality did not increase much over this period. Our results support the view that many permanent changes in income are predictable for consumers, even if they look unpredictable to the econometrician, consistent with models of heterogeneous income profiles.",

keywords = "Consumption, Heterogeneity, Incomplete markets, Inequality, Risk",

author = "Primiceri, {Giorgio E.} and {van Rens}, Thijs",

note = "Funding Information: This paper was prepared for the April 2008 Carnegie-Rochester Conference on Public Policy. We are grateful to Pierre-Olivier Gourinchas and Jonathan Parker for many helpful discussions and to Richard Blundell, Chris Carroll, Guido Lorenzoni, Alberto Martin, Claudio Michelacci, Josep Pijoan-Mas, Chris Telmer, our discussants Mikl{\'o}s Koren, Michele Pellizzari and especially Jonathan Heathcote, and the editor Mark Bils for helpful suggestions. Thijs van Rens gratefully acknowledges financial support from the Spanish Ministry of Education and Science (Grants Ju{\'a}n de la Cierva, SEJ2005-01124 and SEJ2006-02235); the Generalitat de Catalunya, DURSI (Grants Beatriu de Pin{\'o}s and 2005SGR00490) and the Barcelona GSE Research Network. ",

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KW - Risk

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Heterogeneous life-cycle profiles, income risk and consumption inequality

Abstract

Funding

Keywords

ASJC Scopus subject areas

UN SDGs

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