Etheridge, Ben (2015) A test of the household income process using consumption and wealth data. European Economic Review, 78. pp. 129-157. DOI https://doi.org/10.1016/j.euroecorev.2015.05.003
Etheridge, Ben (2015) A test of the household income process using consumption and wealth data. European Economic Review, 78. pp. 129-157. DOI https://doi.org/10.1016/j.euroecorev.2015.05.003
Etheridge, Ben (2015) A test of the household income process using consumption and wealth data. European Economic Review, 78. pp. 129-157. DOI https://doi.org/10.1016/j.euroecorev.2015.05.003
Abstract
The evolution of household income can be explained almost equally well by rival models. However, rival models have very different implications for other household behaviours, such as consumption. I therefore test between two prominent models in the UK using panel data on consumption and wealth, as well as income, over 1991–2006. To operate the test, I show that long-lived income shocks transmit far less than one-for-one through to consumption, and particularly so for younger households. I then compare these estimates of transmission with estimates of households’ ability to smooth shocks, captured by the data on wealth. Conditional on the suitability of the consumption model, my estimates provide evidence against the restricted income process (RIP) and in favour of an alternative heterogeneous income process (HIP). This finding also explains why cross-sectional consumption inequality grew slowly over the period even though the variance of long-lived shocks was high. Finally, I conclude that it is important to consider mean reversion of shocks when constructing life-cycle consumption models.
Item Type: | Article |
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Subjects: | H Social Sciences > H Social Sciences (General) H Social Sciences > HB Economic Theory |
Divisions: | Faculty of Social Sciences Faculty of Social Sciences > Economics, Department of |
SWORD Depositor: | Unnamed user with email elements@essex.ac.uk |
Depositing User: | Unnamed user with email elements@essex.ac.uk |
Date Deposited: | 09 Jun 2015 11:10 |
Last Modified: | 15 Jan 2022 00:56 |
URI: | http://repository.essex.ac.uk/id/eprint/13906 |
Available files
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