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Type: IFS Working Papers Authors: Richard Blundell, Luigi Pistaferri and Ian Preston ISSN: 1742-0415
Volume, issue, pages: 27 pp.
JEL classification: C30, D41, D91
This paper assesses the accuracy of decomposing income risk into permanent and transitory components using income and consumption data. We develop a specific approximation to the optimal consumption growth rule and use Monte Carlo evidence to show that this approximation can provide a robust method for decomposing income risk. The availability of asset data enables the use of a more accurate approximation allowing for partial sef-insurance against permanent shocks. We show that the use of data on median asset holdings corrects much of the error in the simple approximation which assumes no self-insurance against permanent shocks. Search |
 View all IFS Working Papers in the series
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