Higher-Order Income Risk over the Business Cycle

Alexander Ludwig and Christopher Busch

No 1159, Working Papers from Barcelona School of Economics

Abstract: We extend the canonical income process with persistent and transitory risk to cyclical shock distributions with left-skewness and excess kurtosis. We estimate our income process by GMM for US household data. We find countercyclical variance and procyclical skewness of persistent shocks. All shock distributions are highly leptokurtic. The tax and transfer system reduces dispersion and left-skewness. We then show that in a standard incomplete-markets life-cycle model, first, higher-order risk has sizable welfare implications, which depend on risk attitudes; second, it matters quantitatively for the welfare costs of cyclical idiosyncratic risk; third, it has non-trivial implications for self-insurance against shocks.

Keywords: idiosyncratic income risk; cyclical income risk; life-cycle model (search for similar items in EconPapers)
JEL-codes: D31 E24 E32 H31 J31 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-dge, nep-lma, nep-mac, nep-ore and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Related works:
Journal Article: HIGHER‐ORDER INCOME RISK OVER THE BUSINESS CYCLE (2024)
Working Paper: Higher-order income risk over the business cycle (2021)
Working Paper: Higher-Order Income Risk over the Business Cycle (2020)
Working Paper: Higher-Order Income Risk over the Business Cycle (2020)
Working Paper: Higher-order income risk over the business cycle (2020)
Working Paper: Higher-order income risk over the business cycle (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1159

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