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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.
Authors
CPP Co-Director
Richard is Co-Director of the Centre for the Microeconomic Analysis of Public Policy (CPP) and Senior Research Fellow at IFS.
Research Fellow University College London
Ian is a Research Fellow of the IFS and a Professor of Economics at UCL. He joined UCL in 1991 and has been attached to the IFS since 1990.
Stanford University
Working Paper details
- DOI
- 10.1920/wp.ifs.2004.0427
- Publisher
- IFS
Suggested citation
R, Blundell and L, Pistaferri and I, Preston. (2004). Imputing consumption in the PSID using food demand estimates from the CEX. London: IFS. Available at: https://ifs.org.uk/publications/imputing-consumption-psid-using-food-demand-estimates-cex (accessed: 28 March 2024).
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