We would like to thank the co-editor and anonymous referees for many helpful comments. This research is part of the program of research of the ESRC Centre for the Microeconomic Analysis of Public Policy at IFS.
Decomposing changes in income risk using consumption data
Article first published online: 12 MAR 2013
Copyright © 2013 Richard Blundell, Hamish Low, and Ian Preston
Volume 4, Issue 1, pages 1–37, March 2013
How to Cite
Blundell, R., Low, H. and Preston, I. (2013), Decomposing changes in income risk using consumption data. Quantitative Economics, 4: 1–37. doi: 10.3982/QE44
- Issue published online: 12 MAR 2013
- Article first published online: 12 MAR 2013
- Submitted September, 2012. Final version accepted October, 2012.
- Income risk;
We develop a new approach to the decomposition of income risk within a nonstationary model of intertemporal choice. The approach allows for changes in income risk over the life cycle and across the business cycle, allowing for mixtures of persistent and transitory components in the dynamic process for income. We focus on what can be learned from repeated cross-section data alone. Evidence from a stochastic simulation of consumption choices in a nonstationarity environment is used to show the robustness of the method for decomposing income risk. The approach is used to investigate the changes in income risk in Britain across the inequality growth period from the late 1970s to the late 1990s. We document peaks in the variance of permanent shocks at the time of recessions.