Permanent Versus Transitory Income Shocks Over the Business Cycle

74 Pages Posted: 11 Feb 2022

See all articles by Concetta Rondinelli

Concetta Rondinelli

Bank of Italy

Agnes Kovacs

University of Manchester

Serena Trucchi

Cardiff University

Date Written: November 23, 2021

Abstract

This paper investigates how income shocks shape consumption dynamics over the business cycle. First, we break new ground and create a unique panel dataset of transitory and permanent income shocks by combining household-level income expectations with the findings of the DNB Household Survey conducted in the Netherlands in the period 2006-2018. We then use the first and second moments of the identified income shocks in a structural life-cycle framework and show that the model matches the observed consumption patterns well. Finally, using counterfactual model simulations, we assess the importance of the nature of income shocks (permanent income hypothesis), future income uncertainties (precautionary saving motive), and cohort effects, and show how they individually shaped consumption dynamics over that period in the Netherlands.

Keywords: subjective expectations, income shocks, consumption, business cycle

JEL Classification: C13, D12, D91, E21

Suggested Citation

Rondinelli, Concetta and Kovacs, Agnes and Trucchi, Serena, Permanent Versus Transitory Income Shocks Over the Business Cycle (November 23, 2021). Bank of Italy Temi di Discussione (Working Paper) No. 1354, Available at SSRN: https://ssrn.com/abstract=3960059 or http://dx.doi.org/10.2139/ssrn.3960059

Concetta Rondinelli (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Agnes Kovacs

University of Manchester ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

Serena Trucchi

Cardiff University ( email )

Aberconway Building
Colum Drive
Cardiff, Wales CF10 3EU
United Kingdom

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