Open AccessDecomposing changes in income risk using consumption data
Author(s) -
Blundell Richard,
Low Hamish,
Preston Ian
Publication year - 2013
Publication title -
quantitative economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 4.062
H-Index - 27
eISSN - 1759-7331
pISSN - 1759-7323
DOI - 10.3982/qe44
Subject(s) - business cycle , economics , econometrics , robustness (evolution) , recession , consumption (sociology) , permanent income hypothesis , variance (accounting) , economic inequality , inequality , monetary economics , macroeconomics , mathematics , market liquidity , mathematical analysis , social science , biochemistry , chemistry , sociology , gene , accounting
We develop a new approach to the decomposition of income risk within a nonstationary model of intertemporal choice. The approach allows for changes in income risk over the life cycle and across the business cycle, allowing for mixtures of persistent and transitory components in the dynamic process for income. We focus on what can be learned from repeated cross‐section data alone. Evidence from a stochastic simulation of consumption choices in a nonstationarity environment is used to show the robustness of the method for decomposing income risk. The approach is used to investigate the changes in income risk in Britain across the inequality growth period from the late 1970s to the late 1990s. We document peaks in the variance of permanent shocks at the time of recessions.