In this paper we highlight the important role the PSID has played in our understanding of income dynamics and consumption insurance, see for example, Krueger and Perri (2006); Blundell, Pistaferri, and Preston (2008), henceforth, (BPP); and Guvenen and Smith (2014). In the partial insurance approach, transmission parameters are specified that link "shocks" to income with consumption growth. These transmission parameters can change across time and may differ across individuals reflecting the degree of "insurance" available. They encompass self-insurance through simple credit markets as well as other mechanisms used to smooth consumption.We explore the nonlinear nature of income shocks and describe a new quantile-based panel data framework for income dynamics, developed in Arellano, Blundell, and Bonhomme (ABB 2017). In this approach the persistence of past income shocks is allowed to vary according to the size and sign of the current shock. We find that the model provides a good match with data on family earnings and on individual wages from the PSID. We confirm the results onincome dynamics using the extensive population register data from Norway.
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