Permanent Income Shocks, Target Wealth, and the Wealth Gap

Tullio Jappelli () and Luigi Pistaferri ()
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Luigi Pistaferri: Stanford University, SIEPR, NBER and CEPR

CSEF Working Papers from Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy

Abstract: We test the key implication of the buffer stock model, namely that any revision in permanent income leads to a proportionate revision in target wealth. We use panel data on the amount of wealth held for precautionary purposes available in the 2002-2016 SHIW. Using an instrumental variable approach to overcome measurement error issues and direct estimates of the permanent component of income, we find that households indeed revise approximately one-for-one their target wealth in response to permanent income shocks. We explore heterogeneity of the response across the cash-on-hand distribution, for positive and negative shocks, and for shocks of different size. We also find that the change in the ratio of cash-on-hand to permanent income is negatively correlated with the “wealth gap”, particularly for individuals whose wealth is substantially above target.

Keywords: Buffer Stock Model; Target Wealth; Wealth Gap; Permanent Income Shocks; Panel Data. (search for similar items in EconPapers)
JEL-codes: D12 D14 E21 (search for similar items in EconPapers)
Date: 2020-08-07
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

Forthcoming in The Economic Journal

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http://www.csef.it/WP/wp574.pdf (application/pdf)

Related works:
Journal Article: Permanent Income Shocks, Target Wealth, and the Wealth Gap (2025)
Working Paper: Permanent Income Shocks, Target Wealth, and the Wealth Gap (2020)
Working Paper: Permanent Income Shocks, Target Wealth, and the Wealth Gap (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:sef:csefwp:574

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