Nonlinear Micro Income Processes with Macro Shocks

Martín Almuzara (), Manuel Arellano, Richard Blundell () and Stéphane Bonhomme ()
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Martín Almuzara: Federal Reserve Bank of New York, https://www.newyorkfed.org/
Stéphane Bonhomme: University of Chicago, https://www.uchicago.edu/

Working Papers from CEMFI

Abstract: We propose a nonlinear framework to study the dynamic transmission of aggregate and idiosyncratic shocks to household income that exploits both macro and micro data. Our approach allows us to examine empirically the following questions: (a) How do business-cycle fluctuations modulate the persistence of heterogeneous individual histories and the risk faced by households? (b) How do aggregate and idiosyncratic shocks propagate over time for households in different macro and micro states? (c) How do these shocks shape the cost of business-cycle risk? We develop new identification and estimation techniques, and provide a detailed empirical analysis combining macro time series for the U.S. and a time series of household panels from the PSID.

Keywords: Income process; business cycle; persistence; exposure to aggregate shocks. (search for similar items in EconPapers)
JEL-codes: C23 D31 E32 (search for similar items in EconPapers)
Date: 2025-08
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