learning your earning are labor income shocks really very persistent in this paper we examine the risk situation facing individuals in the labor market the current consensus in the literature is that the labor income process has a large random walk component we argue two points first the estimates of persistence from income data appear to be upward biased due to the omission of heterogeneity in income pro les across the population that would be implied for example by a human capital model with heterogeneity when we allow for dierences in pro les the estimated persistence falls from 0 99 to about 0 8 moreover the main evidence against pro le heterogeneity in the existing literature that the autocorrelations of income changes are small and typically negative is also replicated by the pro le heterogeneity model we estimate casting doubt on the previous interpretation of this evidence second we embed this process in a life cycle model to examine how it alters individuals consumption saving decision we assume that as seems plausible individuals do not know their pro les exactly at the beginning of life but learn in a bayesian way with successive income observations we nd that learning is very slow and aects consumption decision throughout the life cycle the model generates substantial rise in consumption inequality over the life cycle which matches empirical observations deaton and paxson 1994 moreover the shape of the age inequality pro le is non concave as in the data but unlike in a model with very persistent shocks finally the consumption pro les of college graduates are steeper than those of high school graduates in the model consistent with the data because they face a wider dispersion of and hence uncertainty about income growth rates overall this evidence indicates that income shocks may be signi cantly less persistent than what is currently assumed

the life cycle effects of house price changes we develop a life cycle model that explicitly incorporates the dual feature of housing as both a consumption good and an investment asset our analysis indicates that the consumption and welfare consequences of house price changes on individual households vary significantly in particular the non housing consumption of young and old homeowners is much more sensitive to house price changes than that of middle aged homeowners more importantly while house price appreciation increases the net worth and consumption of all homeowners it only improves the welfare of old homeowners renters and young homeowners are worse off due to higher lifetime housing consumption costs

how important is variability in consumer credit limits abstract using a large panel this paper first demonstrates that individuals gain and lose access to credit frequently the estimated credit limit volatility is larger than most estimates of income volatility and varies over the business cycle within a model variable credit limits create a reason for households to hold both high interest debts and low interest savings at the same time using the estimated credit volatility the model explains why around one third of american households engage in this credit card puzzle the approach also offers an important new channel through which financial system uncertainty can affect household decisions

quantitative aggregate economics i am delighted to be able to present this lecture before so many people i m also very happy when i get to work with models inhabited by many people that is the key to the framework for which ed prescott and i were cited by the nobel committee individuals are introduced explicitly in the models their decision problems are fully dynamic they are forward looking that is one of the prerequisites for what we ultimately seek which is a framework we can use to evaluate economic policy the eminent researcher and 1995 nobel laureate in economics bob lucas from whom i have learned a great deal wrote one of the functions of theoretical economics is to provide fully articulated artificial economic systems that can serve as laboratories in which policies that would be prohibitively expensive to experiment with in actual economies can be tested out at much lower cost lucas 1980 p 696 our task as i see it is to write a fortran program that will accept specific economic policy rules as input and will generate as output statistics describing the operating characteristics of time series we care about which are predicted to result from these policies pp 709 10 the desired environments to which lucas refers would make use of information on individual responses that can be documented relatively cheaply by means of censuses panels and other surveys p 710 lucas seems to suggest that economic researchers place people in desired model environments and record how they behave under alternative policy rules in practice that is easier said than done the key tool macroeconomists use is the computational experiment with its help the researcher performs exactly what i just described places the model s people in the desired environment and records their behavior but the purpose of the computational experiment is broader than only to evaluate policy rules the computational experiment is useful for answering a host of quantitative questions that is those for which we seek numerical answers when evaluating government policy the policy is stated in the form of a rule that specifies how the government will behave what action to take under various contingencies today and in the indefinite future that is one reason it would be so difficult and prohibitively expensive to perform the alternative lucas mentions namely to test the policies in actual economies

wealth distribution in life cycle economies abstract this paper compares the age wealth distribution produced in life cycle economies to the corresponding distribution in the us economy the idea is to calibrate the model economies to match features of the us earnings distribution and then examine the wealth distribution implications of the model economies the findings are that the calibrated model economies with earnings and lifetime uncertainty can replicate measures of both aggregate wealth and transfer wealth in the us furthermore the model economies produce the us wealth gini and a significant fraction of the wealth inequality within age groups however the model economies produce less than half the fraction of wealth held by the top 1 percent of us households

income dynamics and life cycle inequality mechanisms and controversies this study focuses on the transmission of inequality over the working life a model of constrained intertemporal choice is used to provide structure to the distributional dynamics of wages earnings income and consumption the mechanisms used to insure labour market shocks are examined in a partial insurance setting where the manner and scope for insurance depends on the access to credit the information available to consumers and the durability of income shocks drawing on recent research family labour supply the credit market and the tax system are all shown to play a key role these mechanisms vary in importance across different points of the life cycle and the business cycle 2014 the author s the economic journal published by john wiley sons ltd on behalf of royal economic society

why are households that report the lowest incomes so well off we document that households in the uk with extremely low measured income tend to spend much more than those with merely moderately low income this phenomenon is evident throughout three decades worth of microdata and across different employment states levels of education and marital statuses of the likely explanations we provide several arguments that discount over reporting of expenditure and argue that under reporting of income plays the major role in particular by using a dynamic model of consumption and saving and paying special attention to poverty dynamics we show that consumption smoothing cannot explain all the apparent dissaving

cyclical dynamics in idiosyncratic labor market risk is individual labor income more risky in recessions this is a difficult question to answer because existing panel data sets are so short to address this problem we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced variation in the cross sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930 even though our data do not begin until 1968 we implement this estimator using household level labor earnings data from the panel study of income dynamics we estimate that idiosyncratic risk is i highly persistent with an annual autocorrelation coefficient of 0 95 and ii strongly countercyclical with a conditional standard deviation that increases by 75 percent from 0 12 to 0 21 as the macroeconomy moves from peak to trough

how important are idiosyncratic shocks evidence from labor supply the notion that individuals face idiosyncratic labor market uncertainty is a common one government programs such as unemployment insurance and social security are motivated by such an idea economic theory ranging from labor supply to savings behavior to asset pricing often presupposes that such risks are important a number of papers however have questioned this orthodoxy sumru altug and robert a miller 1990 for instance are unable to reject a set of factor structure restrictions implied by complete markets john h cochrane 1991 and barbara j mace 1991 find evidence of consumption insurance although not against all types of risks robert m townsend 1994 documents evidence of risk sharing in indian villages michael p keane and kenneth i wolpin 1997 argue that 90 percent of the labor market uncertainty faced by a group of males is resolved by age 16 other studies have suggested the opposite papers by joseph g altonji et al 1991 orazio attanasio and steven j davis 1996 and attanasio and guglielmo weber 1992 as well as some evidence in cochrane 1991 and mace 1991 suggest that risk sharing is far from complete in particular for low frequency shocks angus deaton and christina paxson 1994 show that inequality in labor earnings total income and consumption increases with age they suggest that this is difficult to reconcile with standard models of complete consumption insurance in storesletten et al 2000 we ask similar questions using a general equilibrium life cycle model we conclude that increasing inequality with age consumption inequality in particular is difficult to explain in the absence of uninsured idiosyncratic shocks received throughout the working years we argue that between 40 percent and 50 percent of an individual s lifetime uncertainty remains unresolved prior to entering the workforce this paper further examines the implications of increasing inequality with age we begin by asking if a very different model one which features full risk sharing can account for the data the idea which deaton and paxson 1994 attribute to steven davis is that increasing income and consumption inequality can arise in a perfect insurance setting if i dispersion in labor productivity increases with age and ii preferences are nonseparable between leisure and consumption if this is true an efficient allocation may feature increasing consumption dispersion because higher productivity workers will supply relatively more labor and be compensated with more consumption we develop a specific model and find that for plausible parameter values this is exactly what happens what also happens however is that such an allocation features increasing inequality in hours worked using data from the panel study on income dynamics psid we show that inequality in hours worked is roughly constant across age this casts doubt on the full risksharing model and strengthens the argument in favor of uninsurable idiosyncratic risk the remainder of our paper provides a more general discussion of the evidence on inequality and age and how this suggests an important role for idiosyncratic labor market shocks

sources of lifetime inequality is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime we answer this question within a model that features idiosyncratic shocks to human capital estimated directly from data as well as heterogeneity in ability to learn initial human capital and initial wealth we find that as of age 23 differences in initial conditions account for more of the variation in lifetime earnings lifetime wealth and lifetime utility than do differences in shocks received over the working lifetime jel d31 d91 j24 j31 to what degree is lifetime inequality due to differences across people established early in life as opposed to differences in luck experienced over the working lifetime among the individual differences established early in life which ones are the most important a convincing answer to these questions is of fundamental importance first and most simply an answer serves to contrast the potential importance of the myriad policies directed at modifying or at providing insurance for initial conditions e g public education against those directed at shocks over the working lifetime e g unemployment insurance second a discussion of lifetime inequality cannot go too far before discussing which specific type of initial condition is the most critical for determining how one fares in life third a useful framework for answering these questions should also be central in the analysis of a wide range of policies considered in macroeconomics public finance and labor economics we view lifetime inequality through the lens of a risky human capital model agents differ in terms of three initial conditions initial human capital learning ability and financial wealth initial human capital can be viewed as controlling the intercept of an agent s mean earnings profile whereas learning ability acts to rotate

the information technology revolution and the unsecured credit market the information technology it revolution coincided with the transformation of the u s unsecured credit market households borrowing increased rapidly and there was an even faster increase in bankruptcy filings a risk of default model with asymmetric information and costly screening is introduced to study this period when information costs are high the design of contracts under private information prevents some households from borrowing with a risk of default as information costs drop households borrow more and bankruptcy filings increase quantitative exercises suggest that the it revolution may have played an important role in the transformation of the unsecured credit market jel e43 e44 g33

the effectiveness of government debt and transfers as insurance abstract government debt and redistributive taxation can help people to smooth consumption when facing uninsurable individual specific risk i examine the effects that variations in public debt and transfers have on risk sharing efficiency and the distribution of resources i find that risk sharing can be improved significantly by both debt and transfers but that debt has adverse effects on equity when used in isolation debt will enhance welfare if transfers are lower than optimal however the beneficial effects of public debt vanish if transfers are used optimally

financial frictions occupational choice and economic inequality we develop a quantitative theory of entrepreneurship income inequality and nancial frictions disciplined with household data from brazil the theory extends lucas 1978 by modeling heterogeneity in two skills working and managerial skills consistently with the evidence the theory implies three occupational categories workers employers and self employed entrepreneurs we nd that the correlation between working and managerial skills matters importantly for the distribution of earnings across occupations and for the quantitative implications of nancial frictions we also nd

transitional dynamics and the distribution of wealth in a neoclassical growth model abstract the evolution of the personal distribution of wealth in a standard neoclassical growth model is studied if the economy is growing toward the steady state and preferences are such that marginal utility from consumption is infinite finite at some all positive non negative consumption level s then the average saving propensity of agents is positively negatively related to their wealth if the economy is decaying toward the steady state these relationships are reversed if wealth and average saving propensity are positively negatively related the distribution of current period wealth lorenz dominates is lorenz dominated by next period s distribution of wealth

consumer bankruptcy a fresh start consumer bankruptcy provides partial insurance against bad luck but by driving up interest rates makes life cycle smoothing more difficult we argue that to assess this trade off one needs a quantitative model of consumer bankruptcy with three key features life cycle component idiosyncratic earnings uncertainty and expense uncertainty exogenous negative shocks to household balance sheets we find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules more persistent shocks make the bankruptcy option more desirable larger transitory shocks have the opposite effect our findings suggest the current us bankruptcy system may be desirable for reasonable parameter values jel d14 d91 k35

the method of endogenous gridpoints with occasionally binding constraints among endogenous variables we show how the method of endogenous gridpoints can be extended to solve models with occasionally binding constraints among endogenous variables very efficiently we present the method for a consumer problem with occasionally binding collateral constraints and non separable utility in durable and non durable consumption this problem allows for a joint analysis of durable and non durable consumption in models with uninsurable income risk which is important to understand patterns of consumption saving and collateralized debt we illustrate the algorithm and its efficiency by calibrating the model to us data

international interdependencies in fiscal stabilization policies abstract trade links imply that business cycle fluctuations are transmitted among trade partners to the extent that fiscal policy can mitigate business cycle fluctuations international interdependencies in stabilization policies arise we analyse in a two country general equilibrium model the role of fiscal policy in mitigating risk or providing implicit insurance in the presence of capital market imperfections and adjustment failures rigid wages it is shown that there is a welfare case for an active stabilization policy and that it is larger in the presence of adjustment failures rigid wages non cooperative policy decisions imply inefficiencies in fiscal stabilization policies which in the case of flexible wages may imply too much stabilization whereas stabilization is always insufficient in the case of rigid wages

the intergenerational persistence of lifetime earnings abstract this paper proposes a new method for estimating the intergenerational persistence of lifetime earnings from data that contain only short sections of individual earnings histories the approach infers lifetime earnings persistence from the persistence of short earnings averages together with information about the stochastic process governing individual earnings i find that lifetime earnings are substantially more persistent than previous estimates based on short panel data suggest about 54 of lifetime earnings differences between fathers persist into their sons generation this persistence estimate exceeds previous estimates based on five year earnings averages by one third these findings are robust against alternative assumptions about the data generating process for earnings

accounting for the u s earnings and wealth inequality we show that a theory of earnings and wealth inequality based on the optimal choices of ex ante identical households that face uninsured idiosyncratic shocks to their endowments of efficiency labor units accounts for the u s earnings and wealth inequality almost exactly

relative wage movements and the distribution of consumption we analyze how relative wage movements among birth cohorts and education groups affected the distribution of household consumption and economic welfare our empirical work draws on the best available cross sectional data sets to construct synthetic panel data on u s consumption labor supply and wages during the 1980s we find that low frequency movements in the cohort education structure of pretax hourly wages among men drove large changes in the distribution of household consumption the results constitute a spectacular failure of between group consumption insurance a failure not explained by existing theories of informationally constrained optimal consumption behavior a welfare analysis indicates that the cost of between group consumption variability is larger than the cost of aggregate consumption variability by two orders of magnitude

understanding consumption smoothing evidence from the u s consumer expenditure data consumption models with endogenous debt constraints differ from standard incomplete markets models in their predictions about an individual household s ability to smooth consumption across time and states of the world in this paper we develop these differences both theoretically and quantitatively we then use data from the us consumer expenditure survey ce to assess along which dimensions the predictions of these models are consistent with the empirical evidence we find that both type models fail to fully account for the data and argue that a model that combines aspects of both might be more succesfull

deconstructing life cycle expenditure we revisit two well known facts regarding life cycle expenditures the hump shaped profile of nondurable expenditures and the increase in cross household consumption inequality we document that the behavior of total nondurables masks surprising heterogeneity in the life cycle profile of individual consumption subcomponents we provide evidence that the categories driving life cycle consumption either are inputs into market work or are amenable to home production using a quantitative model we document that the disaggregated life cycle consumption profiles imply a level of uninsurable permanent income risk that is substantially lower than that implied by a model using a composite consumption good

distributional implications of government guarantees in mortgage markets we analyze the removal of the credit risk guarantees provided by the government sponsored enterprises gses in a model with agents heterogeneous in income and house price risk we find that wealth inequality increases driven by higher mortgage spreads and housing rents housing holdings become more concentrated foreclosures fall the removal benefits high income households while hurting low and mid income households renters and highly leveraged mortgagors with conforming loans gse reform requires compensating transfers sufficiently high elasticity of rental supply or linking gse reform with the elimination of the mortgage interest deduction

intertemporal labour supply with search frictions starting in the 1970 s wage inequality and the number of hours worked by employed u s prime age male workers have both increased we argue that these two facts are related we use a labour market model with on the job search where by working longer hours individuals acquire greater skills since job candidates are ranked by productivity greater skills not only increase worker s productivity in the current job but also help the worker to obtain better jobs when job offers become more dispersed wage inequality increases and workers work longer hours to obtain better jobs as a result average hours per worker in the economy increase this mechanism accounts for around two thirds of the increase in hours observed in data part of the increase is inefficient since workers obtain better jobs at the expense of other workers competing for the same jobs copyright oxford university press

rising inequality changes in the distribution of income and consumption in the 1980s this paper examines changes in the distribution of income and consumption in the united states during the 1980s using data from the current population survey income and consumer expenditure survey consumption we reach three primary conclusions first changes in the distribution of consumption parallel changes in the distribution of income the lowest quintile of the consumption distribution received 0 9 percentage points less of total consumption in 1988 than in 1980 the corresponding decline for income was 0 6 percentage points second broad conclusions concerning recent changes in the consumption distribution are not very sensitive to the exact choice of a measure of family needs under a wide variety of alternative household equivalence scales there is a widening in the consumption distribution in the 1980s third the usc of consumption measures of well being in place of measures based on current money income docs change conclusions concerning the extent of poverty in the united stales using the official federal poverty thresholds we find that the overall consumption poverty rate was three percentage points below the income poverty rate in 1988 comparisons of the poverty rates of the elderly and the non elderly are substantially affected by the choice of poverty measure the consumption poverty rare for the elderly was only 60 percent of the rate for adults and one third of the rate for children in 1988 this abstract was borrowed from another version of this item

domestic or global imbalances rising income risk and the fall in the us current account when default leads to exclusion from financial markets the implied loss of consumption smoothing opportunities is more costly when income volatility is high a rise in income risk thus makes default less attractive allowing creditors to relax borrowing limits i show how in an open economy this endogenous financial deepening may reduce aggregate foreign assets in response to a rise in individual income risk against the precautionary savings intuition conditions for this depend on whether default constrains complete or uncontingent contracts the post 1980 rise in us household income risk strongly reduces foreign assets when domestic markets are complete or world interest rates low

inferring labor income risk and partial insurance from economic choices this paper uses the information contained in the joint dynamics of individuals labor earnings and consumption choice decisions to quantify both the amount of income risk that individuals face and the extent to which they have access to informal insurance against this risk we accomplish this task by using indirect inference to estimate a structural consumption savings model in which individuals both learn about the nature of their income process and partly insure shocks via informal mechanisms in this framework we estimate i the degree of partial insurance ii the extent of systematic differences in income growth rates iii the precision with which individuals know their own income growth rates when they begin their working lives iv the persistence of typical labor income shocks v the tightness of borrowing constraints and vi the amount of measurement error in the data in implementing indirect inference we find that an auxiliary model that approximates the true structural equations of the model which are not estimable works very well with negligible small sample bias the main substantive findings are that income shocks are moderately persistent systematic differences in income growth rates are large individuals have substantial amounts of information about their income growth rates and about one half of income shocks are smoothed via partial insurance putting these findings together the amount of uninsurable lifetime income risk that individuals perceive is substantially smaller than what is typically assumed in calibrated macroeconomic models with incomplete markets

macroeconomic effects of the mortgage refinance and the home equity lines of credit abstract i examine how the mortgage refinance and the home equity lines of credit heloc impact the increase in pre crisis mortgage debt and post crisis mortgage defaults financially constrained homeowners can cash out funds through refinancing mortgages or extract home equity through heloc my quantitative exercise shows that prevalent usage of refinancing increases pre crisis mortgage debt which amplifies the post crisis foreclosure rate heloc also contributes to an increase in mortgage defaults though it negligibly impacts pre crisis mortgage debt

social security and old age unemployment risk with efficient wage bargaining i analyze a life cycle economy with old age productivity risk where wages employment and severance payments are set through efficient bargaining between risk averse unions and risk neutral firms allocations with limited union membership are second best inefficient as they generate too little labor supply in young age too much consumption before retirement too little employment of older workers early retirement and too little insurance against old age unemployment providing public transfers to early retirees disability benefits or early pensions might help to increase the degree of risk sharing at the cost of lower old age employment depending on whether absolute risk aversion is increasing or decreasing in consumption these policies might or might not produce efficiency gains at equilibrium

simulating the transmission of wealth inequality via bequests abstract this paper develops calibrates and simulates a dynamic 88 period olg model to study the intergenerational transmission of u s wealth inequality via bequests the model features marriage realistic fertility patterns random death assortative mating based on skills heterogeneous skill endowments heterogeneous rates of return skill inheritability progressive income taxation and resource annuitization via social security all bequests arise from imperfect annuitization nonetheless the model generates a realistic ratio of aggregate wealth to aggregate labor income a realistic bequest flow relative to the stock of wealth and a realistic wealth distribution at retirement skill differences assortative mating social security and the time preference are the primary determinants of wealth inequality bequests do propagate wealth inequality but only in the presence of social security which disproportionately disinherits the lifetime poor intergenerational wealth immobility also considered here is primarily determined by the inheritance of skills from one s parents and the magnification of the impact of this inheritance by marital sorting

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

macroeconomic effects of bankruptcy and foreclosure policies i study the implications of two major debt relief policies in the united states the bankruptcy abuse prevention and consumer protection act bapcpa and the home affordable refinance program harp

consumption inequality and income uncertainty this paper places the debate over using consumption or income in studies of inequality growth in a formal intertemporal setting it highlights the importance of permanent and transitory income uncertainty in the evaluation of growth in consumption inequality we derive conditions under which the growth of variances and covariances of income and consumption can be used to separately identify the growth in the variance of permanent and transitory income shocks household data from britain for the period 1968 1992 are used to show a strong growth in transitory inequality toward the end of this period while younger cohorts are shown to face significantly higher levels of permanent inequality

twenty years of rising inequality in u s lifetime labour income values in this paper we study the evolution of lifetime labour income inequality by constructing present value life cycle measures that incorporate both earnings and employment risk we find that even though lifetime income inequality is 40 less than earnings inequality the total increase in lifetime income inequality over the past 20 years is the same as earnings inequality while the total increase is the same the pathways there differ with earnings inequality experiencing a steady increase and lifetime income inequality increasing in spurts particularly in the latter half of the 1990s finally we find the changes in lifetime income inequality are primarily driven by changes in earnings mobility and changes in the earnings distribution itself changes in employment risk and the composition of the sample such as the shift toward attaining more education and the ageing population do not play a large role 2004 the review of economics studies limited

the macroeconomic implications of rising wage inequality in the united states in recent decades american workers have faced a rising college premium a narrowing gender gap and increasing wage volatility this paper explores the quantitative and welfare implications of these changes the framework is an incomplete markets life cycle model in which individuals choose education intrafamily time allocation and savings given the observed history of the u s wage structure the model replicates key trends in cross sectional inequality in hours worked earnings and consumption recent cohorts enjoy welfare gains on average as higher relative wages for college graduates and for women translate into higher educational attainment and a more even division of labor within the household

pension plan funding technology choice and the equity risk premium in this paper the impact of lazear contracts with defined benefit pensions on aggregate technology composition and the aggregate risk premium is examined in the presence of capital market constraints affecting workers defined benefit pensions bias the economy towards risk free production leveraging the risky technology relaxes the constraints and results in more risky production and a fall in the aggregate risk premium this effect holds with risky debt and low pension shortfall risk but breaks down with high pension shortfall risk a key prediction is that as lazear contracts become less common risky production will increase and the aggregate risk premium will fall

changes in systematic risk following global equity issuance abstract this paper examines changes in systematic risk following global equity issues by us firms models of market segmentation show that if international capital markets are not fully integrated and demand curves for securities are downward sloping firms issue equity at higher prices by issuing in multiple markets compared to issuance on a single domestic market this would imply a reduction in the firm s cost of capital and an increase in firm value using a sample of global equity offers during 1986 1993 we find that us firms that issue equity abroad experience a decline in systematic risk subsequent to issuance after controlling for size volume and leverage effects we find that this decline in systematic risk is larger in magnitude for global compared to a control sample of domestic equity issues the larger the proportion of the offer sold abroad and the larger the increase in trading volume the bigger the decline in systematic risk using a two factor global risk model we find that while firms issuing equity abroad experience a decline in the domestic component of systematic risk the foreign component increases overall however the net effect is a decline in the cost of capital

consumption and labor supply with partial insurance an analytical framework we develop a model with partial insurance against idiosyncratic wage shocks to quantify risk sharing closed form solutions are obtained for equilibrium allocations and for moments of the joint distribution of consumption hours and wages we prove identification and demonstrate how labor supply data are informative about risk sharing the model estimated with us data over the period 1967 2006 implies that i 39 percent of permanent wage shocks pass through to consumption ii the share of wage risk insured increased until the early 1980s and iii preference heterogeneity is important in accounting for observed dispersion in consumption and hours jel e21 e23 e31 e52

full insurance in the presence of aggregate uncertainty this paper tests implications of full consumption insurance the object is to determine how much mileage can be obtained from a model with complete markets with such features as private information or liquidity constraints omitted the implication exploited is that individual consumption responds to aggregate risk but not to idiosyncratic risk the test involves regressing the change in household consumption onto the change in aggregate consumption and other right hand side variables such as the change in household income and change in employment status all variables other than the change in aggregate consumption are predicted to be insignificant in explaining the change in household consumption with observations on consumption and income for 10 695 households from the consumer expenditure survey the results are mixed the results for one specification exponential utility are mostly consistent with full consumption insurance the results for the other specification power utility are not

public versus private provision of liquidity is there a trade off abstract to what extent is public debt private liquidity much policy advice given in the aftermath of the financial crisis rests on the assumption that increasing public debt relaxes borrowing constraints of private households this is the case for ad hoc debt limits which are exogenous to public policy instead if debt limits are fully endogenous as e g in the case of the natural borrowing limit public debt has no impact we assume that borrowing limits arise because of limited contract enforceability and are therefore determined as equilibrium outcomes using an incomplete markets economy in which households are subject to uninsurable earnings shocks we show that public debt provides some liquidity but less so than it would if constraints were imposed ad hoc we show that generating borrowing constraints as an equilibrium outcome substantially alters the answers to other important questions such as for the welfare effects of government debt or its impact on real economic activity

modeling earnings dynamics in this paper we use indirect inference to estimate a joint model of earnings employment job changes wage rates and work hours over a career we use the model to address a number of important questions in labor economics including the source of the experience profile of wages the response of job changes to outside wage offers and the effects of seniority on job changes we also study the dynamic response of wage rates hours and earnings to various shocks and measure the relative contributions of the shocks to the variance of earnings in a given year and over a lifetime we find that human capital accounts for most of the growth of earnings over a career although job seniority and job mobility also play significant roles unemployment shocks have a large impact on earnings in the short run as well as a substantial long term effect that operates through the wage rate shocks associated with job changes and unemployment make a large contribution to the variance of career earnings and operate mostly through the job specific error components of wages and hours

progressive taxation in a dynastic model of human capital abstract we develop a quantitative theory of economic inequality to investigate the effects of replacing the current u s progressive income tax system with a proportional one the cross sectional implications of the theory are used to discipline the assessment of the effects of tax policy and circumvent the lack of conclusive micro evidence on the parameterization of the human capital production technology we find that the elimination of progressive taxation increases steady state level of output by 12 6 capital by 21 8 and consumption by 13 2 moreover it increases economic inequality and its persistence across generations

why has house price dispersion gone up we calibrate a dynamic general equilibrium island model to investigate the 30 year increase in the level of house prices and their dispersion across u s metropolitan areas the model is based on two main assumptions households o w in and out metropolitan areas in response to local productivity shocks and the housing supply cannot adjust instantly because of technological and regulatory constraints the calibration reveals that the observed tightening of housing supply regulation cannot quantitatively account for the rise in the level and dispersion of house prices in equilibrium workers o w out of tightly regulated towards less regulated metropolitan areas undoing most of the price impact of local supply restrictions in contrast the observed increase in wage dispersion across metropolitan areas does create the observed increase in the level and dispersion of house prices workers o w towards exceptionally productive metropolitan areas and drive house prices up the calibration also suggests that the welfare eects of housing supply regulation are large when wages become more dispersed

household choices in equilibrium this paper is an empirical investigation of equilibrium restrictions on household consumption and male labor supply it exploits a simple factor structure rationalized by two assumptions that household allocations are pareto optimal and that the labor market is competitive the paper estimates household preferences and tests how well this parsimonious factor structure represents panel data on married couples and time series data on asset returns most of the estimates are roughly comparable to those found in previous work no evidence against the simple factor representation is found and the intertemporal capital asset pricing model is not rejected copyright 1990 by the econometric society

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

income risk macroeconomic and demographic change and economic inequality in japan abstract using an olg model with heterogeneous households we investigate the relationship among income risk macroeconomic and demographic changes and economic inequality between 1980 and 2000 in japan by decomposing the primary factors in earnings and consumption inequality into macroeconomic variables and the demographic variable we find that our model replicates the evolution of economic inequality in japan by performing counterfactual simulations we demonstrate that two factors changes in time varying macroeconomic factors and the unexpected decline in the total factor productivity growth rate played important roles in the increase in earnings and consumption inequality in the 1990s

uncertainty persistence and heterogeneity a panel data perspective the purpose of this paper is to review newly developed identification and estimation tools that are relevant for the analysis of dynamic dependence structures of income risk i present an application to nonlinear permanent transitory models of household income using data from the panel study of income dynamics psid but the empirical approach is more generally applicable household income processes are of interest because the size of shocks the nature of their persistence and crosshousehold heterogeneity are all important to understand how income inequality varies with age and cohort and how it translates into consumption inequality i argue that going from an econometrics of autocovariances to an econometrics of flexible distributions is feasible and has the potential to reveal richer aspects of risk for example nonlinear persistence of unusual shocks jel c23 d31 d12

personal bankruptcy law debt portfolios and entrepreneurship bankruptcy provides entrepreneurs with insurance against the financial consequences of failure at the cost of worsened credit conditions using a quantitative general equilibrium model of entrepreneurship we show that the presence of secured credit in addition to unsecured credit substantially alters this trade off if secured credit is not available the optimal bankruptcy law is harsh since the negative effect dominates if secured credit is available the optimal law is lenient since entrepreneurs rationed out of the unsecured credit market can still obtain secured credit lowering the costs of worse credit conditions we find significant welfare gains from reforming the law

joint dynamics of house prices and foreclosures this paper studies the joint transitional dynamics of the foreclosures and house prices in a standard life cycle incomplete markets model with housing and a realistic long term mortgage structure we calibrate our model to match several long term features of the u s housing market and analyze the effects of several unexpected and permanent shocks on the house price and the foreclosure rate both across the steady states and along the transition between the steady states we examine permanent unexpected shocks to the risk free interest rate the minimum down payment ratio and unemployment during the transition these shocks create large movements in house prices more importantly the foreclosure dynamics are quite significant along the transition compared to the steady state changes and there are strong feedbacks between foreclosures and house prices we assess the effects of a temporary reduction in the risk free interest rate which has moderate effects on house prices but little effect on foreclosure dynamics we also study the effects of an ex ante macroprudential policy which establishes a minimum down payment requirement at a higher threshold such a macroprudential policy helps substantially stabilize both house prices and foreclosures

the wealth distribution in bewley economies with capital income risk abstract we study the wealth distribution in bewley economies with idiosyncratic capital income risk we show analytically that under rather general conditions on the stochastic structure of the economy a unique ergodic distribution of wealth displays a fat tail

consumption and risk sharing over the life cycle a striking feature of u s data on income and consumption is that inequality increases with age this paper asks if individual specific earnings risk can provide a coherent explanation we find that it can we construct an overlapping generations general equilibrium model in which households face uninsurable earnings shocks over the course of their lifetimes earnings inequality is exogenous and is calibrated to match data from the u s panel study on income dynamics consumption inequality is endogenous and matches well data from the u s consumer expenditure survey the total risk households face is decomposed into that realized before entering the labor market and that realized throughout the working years in welfare terms the latter is found to be more important than the former

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

nonlinear household earnings dynamics self insurance and welfare earnings dynamics are much richer than typically assumed in macro models with heterogeneous agents this holds for individual pre tax and household post tax earnings and across administrative social security administration and survey panel study of income dynamics data we study the implications of two processes for household post tax earnings in a standard life cycle model a canonical earnings process that includes a persistent and a transitory shock and a rich earnings dynamics process that allows for age dependence of moments non normality and nonlinearity in previous earnings and age allowing for richer earnings dynamics implies a substantially better fit of the evolution of cross sectional consumption inequality over the life cycle and of the individual level degree of consumption insurance against persistent earnings shocks richer earnings dynamics also imply lower welfare costs of earnings risk but as the canonical earnings process do not generate enough concentration at the upper tail of the wealth distribution

gaining ground poverty in the postwar united states official measures of poverty in the united states are compiled by the bureau of the census by comparing a household s income level to a prespecified threshold from a theoretical perspective it is more appropriate to evaluate the level of poverty using a consumption based measure of household welfare in this paper i evaluate the level of poverty using expenditure data from the consumer expenditure survey i find that consumption based poverty rates are much lower than those based on income the trend in the poverty rate in the united states is sensitive to the price index and equivalence scales used to adjust the poverty thresholds

how unsecured credit policies influence mortgage and unsecured loan defaults before the global financial crisis the proportion of households defaulting on the mortgage while remaining current on the unsecured loan was almost the same as the proportion of households current on the mortgage but defaulting on the unsecured loan after the crisis the former ratio became higher than the latter by using a heterogeneous agent model with the mortgage and the unsecured loan i examine how the order of defaults changed before and after the crisis i then analyze the impacts of unsecured credit policies on households mortgage and unsecured loan defaults my quantitative exercise shows that both default rates can decrease as the cost for unsecured loan defaults increases

optimal fiscal policy with redistribution i study the optimal taxation oflabor and capital in a dynamic economy subject to government expenditure and technology shocks unlike representative agent ramsey models workers are heterogenous and lump sum taxation is not ruled out i consider two tax scenarios a linear taxation with a lump sum intercept and b nonlinear mirrleesian taxation when taxes are linear i derive a partial equivalence result with ramsey settings that provides a reinterpretation of such analyses i find conditions for perfect tax smoothing oflabor income taxes and zero capital taxation implications that contrast with ramsey are derived for public debt management for the nature of the time inconsistency problem and for the viability of replicating complete markets without state contingent bonds shifts in the distribution of skills provide a novel source for variations in tax rates for the nonlinear tax scenario i show that taxation based on income averages is optimal

risky human capital and deferred capital income taxation abstract we study the structure of optimal wedges and capital taxes in a dynamic mirrlees economy with endogenous distribution of skills human capital is a private stochastic state variable that drives the skill process of each individual building on the findings of the labor literature we construct a tractable life cycle model of human capital evolution with risky investment and stochastic depreciation in this setting we demonstrate the optimality of a a human capital premium i e an excess return on human capital relative to physical capital b a large intertemporal wedge early in the life cycle and c a non zero intratemporal wedge even at the top of the skill distribution at all dates except the last date in the life cycle the main implication for the structure of optimal linear capital taxes is the necessity of deferred taxation of physical capital the average marginal tax rate on physical capital held in every period is zero in present value however expected capital tax payments do not equal zero in every period necessarily agents face negative expected capital tax payments early in the life cycle and positive expected capital tax payments late in the life cycle

human capital risk in life cycle economies i study the effect of market incompleteness on the aggregate economy in a model where agents face idiosyncratic uninsurable human capital investment risk the environment is a general equilibrium lifecycle model with a version of a ben porath 1967 human capital accumulation technology modified to incorporate risk a cara normal specification keeps endogenous decisions independent of individual shock realizations i study stationary equilibria of calibrated cases in which idiosyncratic uninsurable risk arises from specialization risk and career risk specialization risk is such that both mean and variance of the return from training are increasing in the endogenous decision to invest in human capital in the case of career risk however only the mean return is increasing in the decision to invest in human capital with career risk only stationary equilibria resemble those studied by aiyagari 1994 and one concludes that the impact of uninsurable idiosyncratic risk is relatively small with a significant amount of specialization risk however stationary equilibria are severely distorted relative to a complete markets benchmark one aspect of this distortion is that human capital is only about 57 percent as large as its complete markets counterpart this suggests that the two types of risk have very different and quantitatively significant general equilibrium implications keywords human capital risk life cycle incom

heterogeneous life cycle profiles income risk and consumption inequality was the increase in income inequality in the us due to permanent shocks or merely to an increase in the variance of transitory shocks the implications for consumption and welfare depend crucially on the answer to this question we use consumer expenditure survey cex repeated cross section data on consumption and income to decompose idiosyncratic changes in income into predictable life cycle changes transitory and permanent shocks and estimate the contribution of each to total inequality our model fits the joint evolution of consumption and income inequality well and delivers two main results first we find that permanent changes in income explain all of the increase in inequality in the 1980s and 1990s second we reconcile this finding with the fact that consumption inequality did not increase much over this period our results support the view that many permanent changes in income are predictable for consumers even if they look unpredictable to the econometrician consistent with models of heterogeneous income profiles

smoothing with liquid and illiquid assets abstract a quantitative examination of the demand for liquid assets arising from consumption smoothing motives reveals that such demand is very low consumers faced with income streams calibrated to match income and unemployment data and returns and transactions costs calibrated to match us treasury bill data almost exclusively buy and hold illiquid long term assets even though the return premium on long term assets is quite small this is because with standard preferences savings are highly persistent even when risky income is not in the calibrated model the first order autocorrelation of savings is an order of magnitude larger than that of income

crowding out and crowding in when does redistribution improve risk sharing in limited commitment economies abstract when the risk of default constrains financial contracts public insurance policies can significantly affect private risk sharing this is because by changing income expectations and volatility redistribution changes the attractiveness of default and thus endogenous borrowing constraints extending results by krueger and perri 2011 8 this paper analyses the conditions under which redistribution can improve private insurance by making default less attractive to the income rich whose income it reduces i first explain why public redistribution typically crowds out private insurance in the two income economy and identify the role of income persistence and saving after default second i show how in endowment economies with three income states or more and in economies with capital redistributive taxes can improve or crowd in private consumption insurance finally in a quantitative exercise using a realistic income process calibrated to us micro data moderate redistribution crowds in private insurance with production but not in an endowment economy