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Permanent Income Shocks, Target Wealth, and the Wealth Gap

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  • Tullio Jappelli
  • Luigi Pistaferri

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 that people think they must hold for precautionary purposes. Using the covariance restrictions that the model imposes on the joint behavior of income and target wealth, we find that households indeed revise, approximately one for one, their target wealth in response to permanent income shocks. The speed of adjustment of actual wealth to target wealth is similar to that obtained in simulations of a buffer-stock model.

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  • Tullio Jappelli & Luigi Pistaferri, 2025. "Permanent Income Shocks, Target Wealth, and the Wealth Gap," American Economic Journal: Macroeconomics, American Economic Association, vol. 17(1), pages 102-125, January.
    • Handle: RePEc:aea:aejmac:v:17:y:2025:i:1:p:102-25
    DOI: 10.1257/mac.20220160
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    Cited by:

    1. Carmen Aina & Daniela Sonedda, 2022. "Sooner or later? The impact of child education on household consumption," Empirical Economics, Springer, vol. 63(4), pages 2071-2099, October.

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    More about this item

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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