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Most Downloaded Articles
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- Monetary and Macroprudential Policy Rules in a Model with House Price Booms by Kannan, Prakash/ Rabanal, Pau and Scott, Alasdair M.
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- In search of lost time: the neoclassical synthesis by De Vroey, Michel and Duarte, Pedro Garcia
Life Cycle Dynamics of Income Uncertainty and Consumption
1Utah State University, J.Feigen@aggiemail.usu.edu
2Federal Reserve Board, Geng.Li@frb.gov
Citation Information: The B.E. Journal of Macroeconomics. Volume 12, Issue 1, Pages –, ISSN (Online) 1935-1690, DOI: 10.1515/1935-1690.2258, May 2012
- Published Online:
We propose a method for estimating household income uncertainty that does not impose restrictions on the underlying income shocks or assumptions about household behaviors. We measure income uncertainty as the variance of linear projection errors at various future horizons, up to 25 years ahead, conditional on only the information available to households when the projection is made. Our uncertainty estimates change substantially over the life cycle. We calibrate an income process to match our estimates, allowing the variances of both transitory and persistent shocks to change over the life cycle. Relative to previous studies, we find lower and less persistent income uncertainties that call for a life cycle consumption profile with a less pronounced hump.