Martin Browning and Mette Ejrnæs in Journal of Political Economy – Københavns Universitet

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11. september 2018

Martin Browning and Mette Ejrnæs in Journal of Political Economy

Together with Sule Alan, Martin Browning and Mette Ejrnæs has a paper titled “Income and Consumption: a Micro Semi-structural Analysis with Pervasive Heterogeneity” forthcoming in Journal of Political Economy Volume 126, Issue 5.

Mette Ejrnæs explains: Understanding the joint dynamics of income and consumption is crucial for policy issues such as the efficacy of fiscal policy; the design of social insurance; the determinants of saving over the short run and the long run and the tax treatment of different sources of income.

It is well-established that different households have different preferences and face different income processes. We would therefore expect households’ ability to insure them self against negative income shocks would vary. However, we find considerable co-dependent heterogeneity in the parameters governing income and consumption processes. Our results suggest a great deal of heterogeneity in the reaction of consumption to income shocks, highlighting the heterogeneity in the self-insurance available to households.

We have developed a model of consumption and income that allows for pervasive heterogeneity in the parameters of both processes. Introducing co-dependence between household income parameters and preference parameters, we also allow for heterogeneity in the impact of income shocks on consumption. We estimate the parameters of the model using a sample from the Panel Study of Income Dynamics, covering the period 1968 to 2009.