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Daniel Carroll and Eric Young

No 1634, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: This paper studies short-run wealth mobility in a heterogeneous agents, incomplete-markets model. Wealth mobility has a ?hump-shaped? relationship with the persistence of the stochastic process governing labor income: low when shocks are close to i.i.d. or close to a random walk, and higher in between. The standard incomplete markets framework features less wealth mobility than found in the PSID wealth supplements. We include features commonly used in the literature to capture wealth inequality and find that they do little to improve the model?s performance for wealth mobility. Finally, we introduce state-contingent assets, which allow households to partially span the space of labor productivity. Moving toward a more ?complete? market lowers wealth mobility unless the labor income process is very persistent.

Keywords: wealth mobility; inequality; incomplete markets (search for similar items in EconPapers)
JEL-codes: D31 D52 E21 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2016-12-23
New Economics Papers: this item is included in nep-dge and nep-mac
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Handle: RePEc:fip:fedcwp:1634