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Modelling subjective probability distributions for future income

Guest speaker

Manuel Arellano (CEMFI)




Start19.06.2021 10:00End19.06.2021 11:00

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Event summary

We develop an econometric methodology to model income risk and their heterogeneity from the responses to subjective expectations questions of Indian and Colombian households. One conclusion is that not only current income but also its nature and sources matter for risk, thereby calling for a larger state space than is common in the literature. Another conclusion is that linear income processes are soundly rejected in both data sets: Subjective income distributions feature heteroskedasticity, skewness and nonlinear persistence. Heterogeneity matters and is composed of both household specific and aggregate level factors. The precise formulation of the subjective income expectations also matter. We learn from the comparison between the Indian data that targeted annual income risk and the Colombian data that targeted monthly income risk. Taken together, our results suggest complex patterns of transmission of income shocks to consumption, involving precautionary dispersion and skweness motives, which depend on the household position in the income distribution.

Link: https://videoconf-colibri.zoom.us/j/87993887169

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