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Income risk and consumption inequality: a simulation study

Blundell, R; Low, H; Preston, I; (2004) Income risk and consumption inequality: a simulation study. Institute for Fiscal Studies Green open access

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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
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/14802
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