Heterogeneouslife-cycleprofiles,incomeriskand consumption inequality

WastheincreaseinincomeinequalityintheUSduetopermanentshocksormerelyto an increaseinthevarianceoftransitoryshocks?Theimplicationsforconsumptionand welfare dependcruciallyontheanswertothisquestion.WeuseConsumerExpenditure Survey (CEX)repeatedcross-sectiondataonconsumptionandincometodecompose idiosyncraticchangesinincomeintopredictablelife-cyclechanges,transitoryand permanentshocksandestimatethecontributionofeachtototalinequality.Ourmodel fits thejointevolutionofconsumptionandincomeinequalitywellanddeliverstwo mainresults.First,wefindthatpermanentchangesinincomeexplainalloftheincrease in inequalityinthe1980sand1990s.Second,wereconcilethisfindingwiththefactthat consumptioninequalitydidnotincreasemuchoverthisperiod.Ourresultssupportthe view thatmanypermanentchangesinincomearepredictableforconsumers,evenif theylookunpredictabletotheeconometrician,consistentwithmodelsofhetero- geneous incomeprofiles.