Permanent Income Shocks, Target Wealth, and the Wealth Gap

37 Pages Posted: 25 Aug 2020 Last revised: 18 Sep 2022

See all articles by Tullio Jappelli

Tullio Jappelli

CSEF - University of Naples Federico II; University of Naples Federico II - Department of Economics and Statistics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Center for Studies in Economics and Finance - CSEF

Luigi Pistaferri

Centre for Economic Policy Research (CEPR); Stanford University

Date Written: August 2020

Abstract

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.

Suggested Citation

Jappelli, Tullio and Pistaferri, Luigi and Pistaferri, Luigi, Permanent Income Shocks, Target Wealth, and the Wealth Gap (August 2020). NBER Working Paper No. w27709, Available at SSRN: https://ssrn.com/abstract=3679702

Tullio Jappelli (Contact Author)

CSEF - University of Naples Federico II ( email )

University of Naples Federico II - Department of Economics and Statistics ( email )

Via Cintia - Monte S. Angelo
Napoli, 80126
Italy

HOME PAGE: http://www.csef.it/people/jappelli.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

HOME PAGE: http://www.cepr.org/researchers/details/rschcontact.asp?IDENT=106354

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Center for Studies in Economics and Finance - CSEF ( email )

University of Naples Federico II
Via Cinthia - Monte S. Angelo
Napoli, 80146
Italy

HOME PAGE: http://www.csef.it/people/jappelli.htm

Luigi Pistaferri

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Stanford University ( email )

Stanford, CA 94305
United States

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