Blundell, R and Low, H and Preston, I (2004) Income risk and consumption inequality: a simulation study. Institute for Fiscal Studies
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Abstract
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.
| Type: | Report |
|---|---|
| Title: | Income risk and consumption inequality: a simulation study |
| Open access status: | An open access version is available from UCL Discovery |
| Additional information: | ISSN: 1742-0415 |
| UCL classification: | UCL > School of Arts and Social Sciences > Faculty of Social and Historical Sciences > Economics |
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