The Implications of Richer Earnings Dynamics for Consumption and Wealth

63 Pages Posted: 25 Jan 2016

See all articles by Mariacristina De Nardi

Mariacristina De Nardi

University College London, Economics Dpt.; Federal Reserve Bank of Chicago; National Bureau of Economic Research (NBER) - Public Economics

Giulio Fella

Queen Mary, University of London

Gonzalo Paz-Pardo

University College London

Date Written: January 2016

Abstract

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.

Suggested Citation

De Nardi, Mariacristina and Fella, Giulio and Paz-Pardo, Gonzalo, The Implications of Richer Earnings Dynamics for Consumption and Wealth (January 2016). NBER Working Paper No. w21917. Available at SSRN: https://ssrn.com/abstract=2721778

Mariacristina De Nardi (Contact Author)

University College London, Economics Dpt. ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

Federal Reserve Bank of Chicago ( email )

Research Department
230 South LaSalle Street
Chicago, IL 60604
United States
312 322 5769 (Phone)
312 322 2357 (Fax)

HOME PAGE: http://www.nber.org/~denardim

National Bureau of Economic Research (NBER) - Public Economics ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/~denardim

Giulio Fella

Queen Mary, University of London ( email )

Mile End Road
London E1 4NS, London E1 4NS
United Kingdom

Gonzalo Paz-Pardo

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

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