American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Permanent Income Shocks, Target Wealth, and the Wealth Gap
American Economic Journal: Macroeconomics
vol. 17,
no. 1, January 2025
(pp. 102–25)
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.Citation
Jappelli, Tullio, and Luigi Pistaferri. 2025. "Permanent Income Shocks, Target Wealth, and the Wealth Gap." American Economic Journal: Macroeconomics, 17 (1): 102–25. DOI: 10.1257/mac.20220160Additional Materials
JEL Classification
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- E21 Macroeconomics: Consumption; Saving; Wealth
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
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