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Permanent versus Transitory Income Shocks over the Business Cycle

Author

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  • Agnes Kovacs

    (Department of Economics, The University of Manchester; IFS)

  • Concetta Rondinelli

    (Bank of Italy, Economic Outlook and Monetary Policy Directorate)

  • Serena Trucchi

    (Department of Economics, Ca' Foscari University of Venice)

Abstract

This paper investigates the role of subjective income expectations in shaping consumption dynamics of European economies in the last decade. We make two main contributions. We first exploit the joint availability of income expectations and realizations in a unique micro panel-dataset to identify the levels of transitory and permanent income shocks at the individual level. We then evaluate whether these calculated income shocks can help to explain contractions in aggregate consumption over the two most recent crisis. We find strong evidence that consumption behavior during the 2012-2013 crisis can be explained by the observed income shocks, but the same is not true of the 2008-2009 crisis.

Suggested Citation

  • Agnes Kovacs & Concetta Rondinelli & Serena Trucchi, 2018. "Permanent versus Transitory Income Shocks over the Business Cycle," Working Papers 2018:23, Department of Economics, University of Venice "Ca' Foscari".
    • Handle: RePEc:ven:wpaper:2018:23
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    More about this item

    Keywords

    Persistence of income shocks; income uncertainty; expectations; consumption; financial crisis;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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