Understanding the trends in income, consumption and wealth inequality and how important are life-cycle effects?

Mathias Sommer ()
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Mathias Sommer: Sonderforschungsbereich 504, Postal: L 13, 15, D-68131 Mannheim

No 08-12, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim

Abstract: Rising inequality in income, wealth and consumption has received a good deal of public attention in the past years. At the same time, also macroeconomists are more and more interested in inequality as they have expanded their models to incorporate heterogeneity in the household sector. We supply these models with empirical benchmarks for their calibration and contribute to the understanding of the reasons underlying the trends in inequality. Specifically, we employ a variance decomposition and estimate life-cycle profiles of inequality in income, consumption and wealth based on two measures of inequality. We deepen the discussion on wealth inequality by evaluating the relative importance of savings, portfolio choice and inheritances for the accumulation of wealth. To do so, we project active and passive savings based on the observed saving and investment behavior of synthetic cohorts from the German Income and Expenditure Survey (EVS).

Pages: 57 pages
Date: 2008-07-29
Note: Financial support from the Deutsche Forschungsgemeinschaft, SFB 504, at the University of Mannheim, is gratefully acknowledged.
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