Decomposing changes in income risk using consumption data

Richard Blundell (), Hamish Low () and Ian Preston ()
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Ian Preston: Institute for Fiscal Studies and University College London

No W08/13, IFS Working Papers from Institute for Fiscal Studies

Abstract:

This paper concerns the decomposition of income risk into permanent and transitory components using repeated cross-section data on income and consumption. Our focus is on the detection of changes in the magnitudes of variances of permanent and transitory risks. A new approximation to the optimal consumption growth rule is developed. Evidence from a dynamic stochastic simulation is used to show that this approximation can provide a robust method for decomposing income risk in a nonstationary environment. We examine robustness to unobserved heterogeneity in consumption growth and to unobserved heterogeneity in income growth. We use this approach to investigate the growth in income inequality in the UK in the 1980s.

Keywords: Income risk; inequality; approximation methods; consumption (search for similar items in EconPapers)
JEL-codes: C30 D52 D91 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ltv
Date: 2008-11
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