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  5. Permanent Income Shocks, Target Wealth, and the Wealth Gap

American Economic Journal:
Macroeconomics

ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)

Permanent Income Shocks, Target Wealth, and the Wealth Gap

  • Tullio Jappelli
  • Luigi Pistaferri
American Economic Journal: Macroeconomics (Forthcoming)

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 behaviour 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.

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