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Permanent versus transitory income shocks over the business cycle

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  • Kovacs, Agnes
  • Rondinelli, Concetta
  • Trucchi, Serena

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 realizations from the DNB Household Survey for the Netherlands in 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 have individually shaped consumption dynamics over that period in the Netherlands.

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  • Kovacs, Agnes & Rondinelli, Concetta & Trucchi, Serena, 2021. "Permanent versus transitory income shocks over the business cycle," European Economic Review, Elsevier, vol. 139(C).
    • Handle: RePEc:eee:eecrev:v:139:y:2021:i:c:s001429212100194x
    DOI: 10.1016/j.euroecorev.2021.103873
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    More about this item

    Keywords

    Subjective expectations; Income shocks; Consumption; Business cycle;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • 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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