A Tractable Income Process for Business Cycle Analysis

Fatih Guvenen, Alisdair McKay and Conor B. Ryan

No 30959, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We estimate an income process that is consistent with key facts on individual income risk and its variation over the business cycle. In particular, the estimated process generates income fluctuations that display (i) flat and acyclical variance, (ii) volatile and procyclical skewness, (iii) very high kurtosis, and (iv) a moderate rise in cross-sectional inequality over the life cycle, all consistent with the US data. Furthermore, the income process captures the predictable nature of business cycle income risk: income changes during a business cycle episode are partly predicted by income levels before that episode. The estimated process features a time-varying distribution of innovations as well as a factor structure for business cycle exposure. Incorporating the estimated process into a business cycle model adds only one state variable—as in the workhorse persistent-plus-transitory income process—making it a tractable option for modelers.

JEL-codes: E24 E3 J31 (search for similar items in EconPapers)
Date: 2023-02
New Economics Papers: this item is included in nep-lma
Note: AP EFG LS ME
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.nber.org/papers/w30959.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:30959

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w30959

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().