The distributions of annual earnings and interest rates in a continuous time Markov chain economy

Hoang Khieu () and Roberto Leon-Gonzalez
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Hoang Khieu: Fulbright University Vietnam

Economics Bulletin, 2024, vol. 44, issue 3, 1096 - 1108

Abstract: In this note, we show that two-state continuous time Markov processes can generate empirically plausible distributions of annual earnings and interest rates. Annual earnings and interest rates in continuous time models are functions of a path integral over the instantaneous values and therefore continuously distributed. We develop an algorithm computing the cross-sectional distributions of annual earnings and interest rates. This algorithm can be used to simulate annual income and interest rates in continuous time models or calibrate the fundamental parameters of the continuous time Markov processes.

Keywords: path integral; continuous time Markov process; annual interest rate; annual earnings (search for similar items in EconPapers)
JEL-codes: C6 D3 (search for similar items in EconPapers)
Date: 2024-09-30
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