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This paper concerns the decomposition of income risk into permanent and transitory components using repeated cross-section data on income and consumption. Our focus is on the detection of changes in the magnitudes of variances of permanent and transitory risks. A new approximation to the optimal consumption growth rule is developed. Evidence from a dynamic stochastic simulation is used to show that this approximation can provide a robust method for decomposing income risk in a nonstationary environment. We examine robustness to unobserved heterogeneity in consumption growth and to unobserved heterogeneity in income growth. We use this approach to investigate the growth in income inequality in the UK in the 1980s.
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 of Oxford
Hamish is the James Meade Professor of Economics at the University of Oxford, a Professorial Fellow of Nuffield College and a 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.
Working Paper details
- DOI
- 10.1920/wp.ifs.2008.0813
- Publisher
- IFS
Suggested citation
R, Blundell and H, Low and I, Preston. (2008). Decomposing changes in income risk using consumption data. London: IFS. Available at: https://ifs.org.uk/publications/decomposing-changes-income-risk-using-consumption-data-0 (accessed: 19 April 2024).
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