Capital Income Risk and the Dynamics of the Wealth Distribution

Hoang Khieu () and Klaus Wälde

No 11840, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: In this paper, we develop and numerically solve a model of idiosyncratic labour income and idiosyncratic interest rates to predict the evolution of a wealth distribution over time. Stochastic labour income follows a deterministic growth trend and it fluctuates between a wage and unemployment benefits. Stochastic interest rates are drawn initially (ex-ante heterogeneity), fluctuate between two values (ex-post heterogeneity) and can differ in their arrival rates (financial types). A low interest rate implies a stationary long-run wealth distribution, a high interest rate implies non-stationary wealth distributions. Our baseline model matches the evolution of the wealth distribution of the NLSY 79 cohort from 1986 to 2008 very well. When we start in 1986 and target 2008, we obtain a fit of 96.1%: The fit for non-targeted years is 77.0% on average. When targeting the evolution of wealth, the fit is 88.9%. With a more flexible interest rate distribution, the fit can even be increased to 96.7%. Comparing calibrated mean returns with data shows that the flexible interest rate distribution has empirically not convincing "superstar states". In the baseline model, mean returns are empirically convincing. Surprisingly, the standard deviation of model returns is an order of magnitude lower than the empirical standard deviation.

Keywords: capital income risk; NLSY 1979 cohort; dynamics of wealth distributions; Fokker-Planck equations (search for similar items in EconPapers)
JEL-codes: C02 D31 E21 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2018-09
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published - published in: Economic Modelling , 2023, 122, 106243

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Related works:
Journal Article: Capital income risk and the dynamics of the wealth distribution (2023)
Working Paper: Capital Income Risk and the Dynamics of the Wealth Distribution (2019)
Working Paper: Capital Income Risk and the Dynamics of the Wealth Distribution (2018)
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