Testing functional forms of the lifetime income process in the presence of factor loadings

Yuri Ostrovsky

Empirical Economics, 2020, vol. 59, issue 1, No 1, 10 pages

Abstract: Abstract I show that a covariance-based test typically used to distinguish between lifetime income models known as Heterogeneous Income Profiles and Restricted Income Profiles will lead to erroneous conclusions in the presence of time-varying factor loadings on the permanent earnings component. The magnitude of a potential estimation bias associated with this test is examined using a Monte-Carlo simulation exercise.

Keywords: Lifetime income profiles; Monte-Carlo simulation methods; Generalized method of moments (GMM) (search for similar items in EconPapers)
JEL-codes: C33 D31 J31 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s00181-019-01625-4

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