Working Paper: CEPR ID: DP15145
Authors: Tullio Jappelli; Luigi Pistaferri
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 held for precautionary purposes available in the 2002-2016 SHIW. Using an instrumental variable approach to overcome measurement error issues and direct estimates of the permanent component of income, we find that households indeed revise approximately one-for-one their target wealth in response to permanent income shocks. We explore heterogeneity of the response across the cash-on-hand distribution, for positive and negative shocks, and for shocks of different size. We also find that the change in the ratio of cash-on-hand to permanent income is negatively correlated with the “wealth gap”, particularly for individuals whose wealth is substantially above target.
Keywords: buffer stock model; target wealth; wealth gap; permanent income shocks
JEL Codes: D12; D14; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Permanent income shocks (D15) | Adjustments in target wealth (G51) |
| Increase in permanent income (D15) | Proportional increase in target wealth (G19) |
| Change in the ratio of cash-on-hand to permanent income (E41) | Wealth gap (D31) |
| Excess wealth relative to target (G19) | Decumulation of assets (D14) |
| Wealth below target (D31) | Modest adjustments (Y20) |
| Time to close the gap between actual and target wealth (G51) | Adjustment speeds (C22) |