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Consumption and income smoothing

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Abstract:

This article presents a two-sector dynamic general equilibrium model in which income smoothing takes place within the households (intra-temporally), and consumption smoothing takes place among the households (inter-temporally). Idiosyncratic risk-sharing within the family is based on an income smoothing contract. There are two-sectors in the model, the regular sector and the underground sector, and the smoothing comes from the underground sector, which is countercyclical with respect to aggregate GDP. The article shows that the simulated disaggregated consumption and income series (that are the regular and underground consumption flows) are more sensitive to exogenous changes in sector-specific productivity and tax rates than regular and underground income flows, and that this picture is reversed when the aggregate series are considered.

Document Type: Research Article

DOI: https://doi.org/10.1080/00036840600949348

Affiliations: 1: Department of Economics, School of Economics and Management, University of Aarhus, DK-8000 Aarhus, C, Denmark 2: University of Naples Parthenope, Italy

Publication date: 2008-09-01

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