Permanent versus transitory income shocks over the business cycle

Rondinelli, Concetta, Kovacs, Agnes and Trucchi, Serena ORCID: https://orcid.org/0000-0002-1932-7201 2021. Permanent versus transitory income shocks over the business cycle. European Economic Review 139 , 103873. 10.1016/j.euroecorev.2021.103873

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Abstract

This paper investigates how income shocks shape consumption dynamics over the business cycle. First, we break new ground and create a unique panel dataset of transitory and permanent income shocks by combining household-level income expectations with realizations from the DNB Household Survey for the Netherlands in 2006-2018. We then use the first and second moments of the identified income shocks in a structural life-cycle framework and show that the model matches the observed consumption patterns well. Finally, using counterfactual model simulations, we assess the importance of the nature of income shocks (permanent income hypothesis), future income uncertainties (precautionary saving motive), and cohort effects, and show how they have individually shaped consumption dynamics over that period in the Netherlands.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HB Economic Theory
Publisher:	Elsevier
ISSN:	0014-2921
Date of First Compliant Deposit:	10 September 2021
Date of Acceptance:	10 August 2021
Last Modified:	14 Nov 2024 00:15
URI:	https://orca.cardiff.ac.uk/id/eprint/143759

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