Permanent Income Shocks, Target Wealth, and the Wealth Gap

Tullio Jappelli () and Luigi Pistaferri

No 15145, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: D12 D14 E21 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Permanent Income Shocks, Target Wealth, and the Wealth Gap (2025)
Working Paper: Permanent Income Shocks, Target Wealth, and the Wealth Gap (2020)
Working Paper: Permanent Income Shocks, Target Wealth, and the Wealth Gap (2020)
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