Bank of Lithuania

How much do households really know about their future income?


We develop a consumption-savings model that distinguishes households’ perceived income uncertainty from income uncertainty as measured by an econometrician. Households receive signals on their future disposable income that can drive a gap between the two uncertainties. With an uncertainty gap that is consistent with direct estimates stemming from subjective income expectations, the model jointly explains three consumption inequality and insurance measures in US micro data that are not captured without the difference: (i) the cross-sectional variance of households’ consumption, (ii) the covariance of current consumption and income growth and (iii) the income-conditional mean of household consumption.

JEL Codes: E21, D31, D52.

The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania. 

Risk sharing, Advance information, Consumption insurance, Endogenous borrowing constraints, Limited commitment