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Income variance dynamics and heterogenity

Costas Meghir () and Luigi Pistaferri ()

No W01/07, IFS Working Papers from Institute for Fiscal Studies

Abstract: Recent theoretical work has shown the importance of measuring microeconomic uncertainty for models of both general and partial equilibrium under imperfect insurance. In this paper the assumption of i.i.d. income innovations used in previous empirical studies is removed and the focus of the analysis placed on models for the conditional variance of income shocks, that is related to the approporiate measure of risk emphasized by the theory. We first discriminate amongst various models of earnings determination that separate income shocks into idiosyncratic transitory and permanent components. We allow for education-specific differences in the stochastic process for earnings and for measurement error. The conditional variance of the income shocks is then modelled as a parsimonious autoregressive process with both observable and unobserved heterogeneity. The empirical analysis is conducted on data drawn from the 1967-1991 Panel Study of Income Dynamics.

JEL-codes: G11 D12 E21 (search for similar items in EconPapers)
Date: 2001-04-04
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Related works:
Journal Article: Income Variance Dynamics and Heterogeneity (2004) Downloads
Working Paper: Income Variance Dynamics and Heterogeneity (2002) Downloads
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