We test the key implication of the buffer stock model, namely that any revision in permanent income leads to a proportionate revision in target wealth. We use panel data on the amount of wealth held for precautionary purposes available in the 2002-2016 SHIW. Using an instrumental variable approach to overcome measurement error issues and direct estimates of the permanent component of income, we find that households indeed revise approximately one-for-one their target wealth in response to permanent income shocks. We explore heterogeneity of the response across the cash-on-hand distribution, for positive and negative shocks, and for shocks of different size. We also find that the change in the ratio of cash-on-hand to permanent income is negatively correlated with the “wealth gap”, particularly for individuals whose wealth is substantially above target
Presented by:
Prof. Tullio Jappelli (University of Naples Federico II)
Date & time:
December 2, 2020 12:00 pm - December 2, 2020 1:00 pm
Venue:
https://essex-university.zoom.us/j/93723835670 Please note that this event is open to everyone, but those outside of Essex need to register by simply sending their names to iserseminars@essex.ac.uk.
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