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Title:Decomposing changes in income risk using consumption data PDF Logo
Authors:Blundell, Richard
Low, Hamish
Preston, Ian
Issue Date:2008
Series/Report no.:IFS working papers 08,13
Abstract: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.
Subjects:income risk
inequality
approximation methods
consumption
JEL:C30
D52
D91
Document Type:Working Paper
Appears in Collections:IFS Working Papers, Institute for Fiscal Studies (IFS)

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