Permanent Income Shocks, Target Wealth, and the Wealth Gap

37 Pages Posted: 25 Aug 2020

See all articles by Tullio Jappelli

Tullio Jappelli

University of Naples Federico II

Luigi Pistaferri

Stanford University; Centre for Economic Policy Research (CEPR)

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.

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Suggested Citation

Jappelli, Tullio 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)

University of Naples Federico II ( email )

Luigi Pistaferri

Stanford University ( email )

Stanford, CA 94305
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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