Income risk and consumption inequality: a simulation study

Richard Blundell (), Hamish Low and Ian Preston

No W04/26, IFS Working Papers from Institute for Fiscal Studies

Abstract: This paper assesses the accuracy of decomposing income risk into permanent and transitory components using income and consumption data. We develop a specific approximation to the optimal consumption growth rule and use Monte Carlo evidence to show that this approximation can provide a robust method for decomposing income risk. The availability of asset data enables the use of a more accurate approximation allowing for partial self-insurance against permanent shocks. We show that the use of data on median asset holdings corrects much of the error in the simple approximation which assumes no self-insurance against permanent shocks.

Keywords: income risk; inequality; approximation methods; con- (search for similar items in EconPapers)
JEL-codes: C30 D52 D91 (search for similar items in EconPapers)
Pages: 27 pp.
Date: 2004-10-01
New Economics Papers: this item is included in nep-cmp and nep-ltv
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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