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The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Kambourov, Gueorgui

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Lambertini, Luisa

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Online
ISSN
1935-1690
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Life Cycle Dynamics of Income Uncertainty and Consumption

James A. Feigenbaum
  • 1Utah State University,
/ Geng Li
  • 2Federal Reserve Board,
Published Online: 2012-05-23 | DOI: https://doi.org/10.1515/1935-1690.2258

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.

Keywords: income uncertainty; projection errors; life cycle dynamics; precautionary saving; consumption hump

About the article

Published Online: 2012-05-23


Citation Information: The B.E. Journal of Macroeconomics, ISSN (Online) 1935-1690, DOI: https://doi.org/10.1515/1935-1690.2258. Export Citation

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