Permanent versus Transitory Income Shocks over the Business Cycle

47 Pages Posted: 10 Oct 2018

See all articles by Agnes Kovacs

Agnes Kovacs

University of Manchester

Concetta Rondinelli

Bank of Italy

Serena Trucchi

Ca Foscari University of Venice

Date Written: October 2, 2018

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.

Keywords: Persistence of income shocks, income uncertainty, expectations, consumption, financial crisis

JEL Classification: D12, E21

Suggested Citation

Kovacs, Agnes and Rondinelli, Concetta and Trucchi, Serena, Permanent versus Transitory Income Shocks over the Business Cycle (October 2, 2018). University Ca' Foscari of Venice, Dept. of Economics Research Paper Series No. 23/WP/2018, Available at SSRN: https://ssrn.com/abstract=3258950

Agnes Kovacs

University of Manchester

Oxford Road
Manchester, M13 9PL
United Kingdom

Concetta Rondinelli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Serena Trucchi (Contact Author)

Ca Foscari University of Venice

Dorsoduro 3246
Venice, Veneto 30123
Italy

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