Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/86263
Authors: 
Pozzi, Lorenzo
Year of Publication: 
2007
Series/Report no.: 
Tinbergen Institute Discussion Paper 07-069/2
Abstract: 
We investigate the importance of aggregate and consumer-specific or idiosyncratic labour income risk for aggregate consumption changes in the US over the period 1952-2001. Theoretically, the effect of labour income risk on consumption changes is decomposed into an aggregate and into an idiosyncratic part. Empirically, aggregate risk is modelled through a GARCH process on aggregate labour income shocks and individual risk is modelled as an unobserved component and obtained through Kalman filtering. Our results suggest that aggregate labour income risk explains a negligible fraction of the variance of aggregate consumption changes. A more important part of aggregate consumption changes is explained by the unobserved component. The interpretation of this component as reflecting idiosyncratic labour income risk is supported by the finding that it is negatively affected by received consumer transfers. Idiosyncratic labour income risk thus matters for the aggregate economy.
Subjects: 
Labour income uncertainty
consumption
precaution
state space models
GARCH errors
unobserved component
Bayesian
JEL: 
E21
Document Type: 
Working Paper

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