The Implications of Richer Earnings Dynamics for Consumption and Wealth / Mariacristina De Nardi, Giulio Fella, Gonzalo Paz Pardo.

Format:

Book

Author/Creator:

De Nardi, Mariacristina.

Contributor:

National Bureau of Economic Research.

Fella, Giulio.

Pardo, Gonzalo Paz.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21917.

NBER working paper series no. w21917

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2016.

Summary:

Earnings dynamics are much richer than those typically used in macro models with heterogenous agents. This paper provides multiple contributions. First, it proposes a simple non-parametric method to model rich earnings dynamics that is easy to estimate and introduce in structural models. Second, it applies our method to estimate a nonparametric earnings process using two data sets: the Panel Study of Income Dynamics and a large, synthetic, data set that matches the dynamics of the U.S. tax earnings. Third, it uses a life cycle model of consumption to compare the consumption and saving implications of our two estimated processes to those of a standard AR(1). We find that, unlike the standard AR(1) process, our estimated, richer earnings process generates an increase in consumption inequality over the life cycle that is consistent with the data and better fits the savings of the households at the bottom 60% of the wealth distribution.

Notes:

Print version record

January 2016.