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Type: IFS Working Papers ISSN: 1742-0415
Volume, issue, pages: 27 pp.
JEL classification: C30, D52, D91 Keywords: income risk, inequality, approximation methods, con-
New version: W08/13 [Details]
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 self-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 |
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