The Implications of Richer Earnings Dynamics for Consumption and Wealth

Mariacristina De Nardi, Giulio Fella and Gonzalo Paz-Pardo

No 21917, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Earnings dynamics are much richer than those typically used in macro models with heterogenous agents. This paper provides multiple contributions. First, it proposes a simple non-parametric method to model rich earnings dynamics that is easy to estimate and introduce in structural models. Second, it applies our method to estimate a nonparametric earnings process using two data sets: the Panel Study of Income Dynamics and a large, synthetic, data set that matches the dynamics of the U.S. tax earnings. Third, it uses a life cycle model of consumption to compare the consumption and saving implications of our two estimated processes to those of a standard AR(1). We find that, unlike the standard AR(1) process, our estimated, richer earnings process generates an increase in consumption inequality over the life cycle that is consistent with the data and better fits the savings of the households at the bottom 60% of the wealth distribution.

JEL-codes: D14 D31 E21 J31 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-dge and nep-mac
Note: PE
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Citations: View citations in EconPapers (41)

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