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Identifying heterogeneous income profiles using covariances of income levels and future growth rates

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  • Druedahl, Jeppe
  • Munk-Nielsen, Anders

Abstract

This paper shows that a central implication of heterogeneous income profiles (HIP) is that the covariance between the level of income and future income growth rates must become strongly positive from about age 40. Covariances of income levels and future growth rates therefore have strong identifying power for HIP. We show that adding such moments to an estimation can reverse seemingly strong evidence of HIP. We show this both in a small sample Monte Carlo study and using PSID data. Our results are robust to including a fixed effect correlated with the HIP component.

Suggested Citation

  • Druedahl, Jeppe & Munk-Nielsen, Anders, 2018. "Identifying heterogeneous income profiles using covariances of income levels and future growth rates," Journal of Economic Dynamics and Control, Elsevier, vol. 94(C), pages 24-42.
    • Handle: RePEc:eee:dyncon:v:94:y:2018:i:c:p:24-42
    DOI: 10.1016/j.jedc.2018.07.003
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    2. Hayakawa, Kazuhiko, 2024. "Recent development of covariance structure analysis in economics," Econometrics and Statistics, Elsevier, vol. 29(C), pages 31-48.

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    More about this item

    Keywords

    Income risk; Heterogeneity; Consumption-saving;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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