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Working Paper
A leisurely reading of the life-cycle consumption data
A puzzle in consumption theory is the observation of a hump in age-consumption profiles. We study a general equilibrium life-cycle economy with capital in which households include both consumption and leisure in their period utility function. We calibrate the model and find that a significant hump in life-cycle consumption is a feature of the equilibrium. Thus inclusion of leisure in household preferences may provide part of the explanation of observed life-cycle consumption humps.
Working Paper
Household income uncertainties over three decades
We study the trend in household income uncertainty using a novel approach that measures income uncertainty as the variance of forecast errors at each future horizon separately without imposing parametric restrictions on the underlying income shocks. We find that household income uncertainty has risen significantly and persistently since the early 1970s. For example, our measure of near-future uncertainty in total family non-capital income rose about 40 percent between 1971 and 2002. This rising uncertainty is likely due to the increase in variances of both persistent and transitory income ...
Working Paper
Lifecycle dynamics of income uncertainty and consumption
Uninsurable income risk is often cited as an explanation for empirical deviations from the Lifecycle/Permanent-Income Hypothesis such as the observation that the life-cycle profile of mean consumption is hump-shaped. Most methods used for estimating income uncertainty essentially measure the cross-sectional variance of a subpopulation rather than the true uncertainty or riskiness perceived by consumers. In this paper, we employ a nonparametric approach to estimate idiosyncratic income uncertainty. We measure income uncertainties as the variance of income forecasting errors at different ages ...
Working Paper
A semiparametric characterization of income uncertainty over the life cycle
We propose a novel approach to estimate household income uncertainty at various future horizons and characterize how the estimated uncertainty evolves over the life cycle. We measure income uncertainty as the variance of linear forecast errors conditional on information available to households prior to observing the realized income. This approach is semiparametric because we impose essentially no restrictions on the statistical properties of the forecast errors. Relative to previous studies, we find lower and less persistent income uncertainties that call for a life cycle consumption profile ...