The nature of precautionary wealth

Carroll, Christopher D.; Samwick, Andrew A.

doi:10.1016/s0304-3932(97)00036-6

Cited by 637 publications

(516 citation statements)

References 19 publications

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“…13 The random walk specification is often used by the empirical literature to model the permanent component of idiosyncratic labor income risk (Carroll and Samwick, 1997, Hubbard, Skinner, and Zeldes, 1995, Meghir and Pistaferri, 2001, and Storesletten et.al., 2001a. Thus, their estimate of the standard deviation of the error term for the random walk component of annual labor income corresponds to the value of σ y (S).…”

Section: A(l) A(h) δ(L) δ(H) σ η (L) σ η (H)mentioning

confidence: 99%

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Growth and welfare effects of business cycles in economies with idiosyncratic human capital risk

Krebs

2003

Review of Economic Dynamics

109

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractThis paper uses a tractable macroeconomic model with idiosyncratic human capital risk and incomplete markets to analyze the growth and welfare effects of business cycles. The analysis is based on the assumption that the elimination of business cycles eliminates the variation in idiosyncratic risk. The paper shows that a reduction in the variation in idiosyncratic risk decreases the ratio of physical to human capital and increases the total investment return and welfare. If the degree of risk aversion is less than or equal to one, then economic growth is enhanced. This paper also provides a quantitative assessment of the macroeconomic effects of business cycles based on a calibrated version of the model. Even for relatively small degrees of risk aversion (around one) the model implies that the elimination of business cycles has substantial effects on investment in physical and human capital, economic growth, and welfare.JEL Classification: D52, E32, O40

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Section: A(l) A(h) δ(L) δ(H) σ η (L) σ η (H)mentioning

confidence: 99%

“…For the average standard deviation, E[σ y (S)], Carroll and Samwick (1997) and Hubbard et al(1995) (2001) and Storesletten et al(2001a) are the only studies so far that 12 A common choice is δ k = .10. However, Cooley and Prescott (1995) argue that δ k = .05 is more realistic.…”

Section: A(l) A(h) δ(L) δ(H) σ η (L) σ η (H)mentioning

confidence: 99%

Growth and welfare effects of business cycles in economies with idiosyncratic human capital risk

Krebs

2003

Review of Economic Dynamics

109

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“…Thus, conditional on the history of aggregate states, individual log-income follows (approximately) a random walk. 25 The random walk 21 specification is often used by the empirical literature to model the permanent component of the income process (Carroll and Samwick, 1997, Hubbard, Skinner, and Zeldes, 1995, Meghir and Pistaferri, 2001, Storesletten et. al., 2001), 26 and this literature therefore provides us with an estimate of .…”

Section: According To the Model Total Income Of Household Is This Immentioning

confidence: 99%

“…al., 2001), 26 and this literature therefore provides us with an estimate of . Carroll and Samwick (1997) and Hubbard et al (1995) (2001) and Storesletten et al (2001) are the only studies so far that allow the standard deviation of to vary with the aggregate state, . Meghir and Pistaferri (2001) find that the variation of this standard deviation, measured by , is equal to for all education groups and for college-educated individuals.…”

Section: According To the Model Total Income Of Household Is This Immentioning

confidence: 99%

Asset returns in an endogenous growth model with incomplete markets

Krebs

Wilson

2004

Journal of Economic Dynamics and Control

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper analyzes a class of stochastic endogenous growth models with uninsurable idiosyncratic income risk. The model economy is populated by infinitely-lived households who own and operate their own business, work for a stock company, and participate in stock and bond markets. Households have time-and state-additive log-utility preferences and production functions exhibit constant returns to scale with respect to produced input factors (physical and human capital). This paper shows that if the idiosyncratic component of productivity and depreciation shocks is unpredictable, then there exists an equilibrium in which households choose not to trade bonds. This no-trade result implies that equilibria can be found by solving a one-agent decision problem. The paper also analyzes the asset return implications of a calibrated model economy with an individual income process that displays realistic variations in idiosyncratic income risk. The calibrated model economy generates a sizable mean equity premium (1%) if the volatility of implied stock returns matches the volatility of observed U.S. stock returns.JEL Classification Numbers: D52, D58, G12.

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“…The joint test that this is true jointly for all three education groups has a p-value of 13%, which confirms the adequacy of our specification. 18 In the case discussed by Lillard and Reville (1999), u it = tk i + e it + r it and the residuals of log-income in first differences take the form…”

Section: Alternative Specificationsmentioning

confidence: 99%

Income variance dynamics and heterogenity

Meghir¹,

Pistaferri²

2001

Working Paper Series

111

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Recent theoretical work has shown the importance of measuring microeconomic uncertainty for models of both general and partial equilibrium under imperfect insurance. In this paper the assumption of i.i.d. income innovations used in previous empirical studies is removed and the focus of the analysis placed on models for the conditional variance of income shocks, which is related to the measure of risk emphasized by the theory. We first discriminate amongst various models of earnings determination that separate income shocks into idiosyncratic transitory and permanent components. We allow for education-and time-specific differences in the stochastic process for earnings and for measurement error. The conditional variance of the income shocks is modelled as a parsimonious ARCH process with both observable and unobserved heterogeneity. The empirical analysis is conducted on data drawn from the 1967-1992 Panel Study of Income Dynamics. We find strong evidence of sizeable ARCH effects as well as evidence of unobserved heterogeneity in the variances.

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The nature of precautionary wealth

Cited by 637 publications

References 19 publications

Growth and welfare effects of business cycles in economies with idiosyncratic human capital risk

Growth and welfare effects of business cycles in economies with idiosyncratic human capital risk

Asset returns in an endogenous growth model with incomplete markets

Income variance dynamics and heterogenity

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