When Inequality Matters for Macro and Macro Matters for Inequality - PowerPoint PPT Presentation

1. Both Shocks Work The Same Way ‘Jump-drift’ process: ◮ Income flow rate might jump (up or down) ◮ Decays toward zero like an AR(1) ◮ Call the two ‘decay’ parameters ρ 1 and ρ 2

1. Both Shocks Work The Same Way ‘Jump-drift’ process: ◮ Income flow rate might jump (up or down) ◮ Decays toward zero like an AR(1) ◮ Call the two ‘decay’ parameters ρ 1 and ρ 2 Calibration of ρ 1 and ρ 2 ? ◮ Optimize to best match

1. Both Shocks Work The Same Way ‘Jump-drift’ process: ◮ Income flow rate might jump (up or down) ◮ Decays toward zero like an AR(1) ◮ Call the two ‘decay’ parameters ρ 1 and ρ 2 Calibration of ρ 1 and ρ 2 ? ◮ Optimize to best match ◮ Guvenen, Karahan, Ozkan, and Song (2015); ‘GKOS’

1. Both Shocks Work The Same Way ‘Jump-drift’ process: ◮ Income flow rate might jump (up or down) ◮ Decays toward zero like an AR(1) ◮ Call the two ‘decay’ parameters ρ 1 and ρ 2 Calibration of ρ 1 and ρ 2 ? ◮ Optimize to best match ◮ Guvenen, Karahan, Ozkan, and Song (2015); ‘GKOS’

1. Both Shocks Work The Same Way ‘Jump-drift’ process: ◮ Income flow rate might jump (up or down) ◮ Decays toward zero like an AR(1) ◮ Call the two ‘decay’ parameters ρ 1 and ρ 2 Calibration of ρ 1 and ρ 2 ? ◮ Optimize to best match ◮ Guvenen, Karahan, Ozkan, and Song (2015); ‘GKOS’ Results: ◮ ‘Transitory’: Half life is a quarter

1. Both Shocks Work The Same Way ‘Jump-drift’ process: ◮ Income flow rate might jump (up or down) ◮ Decays toward zero like an AR(1) ◮ Call the two ‘decay’ parameters ρ 1 and ρ 2 Calibration of ρ 1 and ρ 2 ? ◮ Optimize to best match ◮ Guvenen, Karahan, Ozkan, and Song (2015); ‘GKOS’ Results: ◮ ‘Transitory’: Half life is a quarter ◮ ‘Persistent’: ρ 2 ≈ 0 . 99 (quarterly)

1. Both Shocks Work The Same Way ‘Jump-drift’ process: ◮ Income flow rate might jump (up or down) ◮ Decays toward zero like an AR(1) ◮ Call the two ‘decay’ parameters ρ 1 and ρ 2 Calibration of ρ 1 and ρ 2 ? ◮ Optimize to best match ◮ Guvenen, Karahan, Ozkan, and Song (2015); ‘GKOS’ Results: ◮ ‘Transitory’: Half life is a quarter ◮ ‘Persistent’: ρ 2 ≈ 0 . 99 (quarterly) ◮ It’s (nearly) a permanent shock

1. Assessment? ‘Persistent’ shock: ◮ Yay!

1. Assessment? ‘Persistent’ shock: ◮ Yay! ◮ Common interpretation of GKOS (including by GKOS):

1. Assessment? ‘Persistent’ shock: ◮ Yay! ◮ Common interpretation of GKOS (including by GKOS): ◮ ‘Friedman’ permanent shocks wrong way to think about it

1. Assessment? ‘Persistent’ shock: ◮ Yay! ◮ Common interpretation of GKOS (including by GKOS): ◮ ‘Friedman’ permanent shocks wrong way to think about it ◮ Looks pretty good to me!

1. Transitory Shock Possibly more problematic. Take 2008 stimulus checks: ◮ Arrived as a lump sum of $600 (or $1200) at instant of time

1. Transitory Shock Possibly more problematic. Take 2008 stimulus checks: ◮ Arrived as a lump sum of $600 (or $1200) at instant of time ◮ AKMWW: $600 shock (for someone with weekly paycheck) is: Week Amount 1 $35.07 2 $33.09 ... ... 13 $17.39 ... ... ∞ 0 Sum: $600

1. Transitory Shock Possibly more problematic. Take 2008 stimulus checks: ◮ Arrived as a lump sum of $600 (or $1200) at instant of time ◮ AKMWW: $600 shock (for someone with weekly paycheck) is: Week Amount 1 $35.07 2 $33.09 ... ... 13 $17.39 ... ... ∞ 0 Sum: $600

1. Transitory Shock Possibly more problematic. Take 2008 stimulus checks: ◮ Arrived as a lump sum of $600 (or $1200) at instant of time ◮ AKMWW: $600 shock (for someone with weekly paycheck) is: Week Amount 1 $35.07 2 $33.09 ... ... 13 $17.39 ... ... ∞ 0 Sum: $600 Is this equivalent to $600 lump sum?

1. Transitory Shock Possibly more problematic. Take 2008 stimulus checks: ◮ Arrived as a lump sum of $600 (or $1200) at instant of time ◮ AKMWW: $600 shock (for someone with weekly paycheck) is: Week Amount 1 $35.07 2 $33.09 ... ... 13 $17.39 ... ... ∞ 0 Sum: $600 Is this equivalent to $600 lump sum? ◮ For nondurables spending – see next slides

1. Transitory Shock Possibly more problematic. Take 2008 stimulus checks: ◮ Arrived as a lump sum of $600 (or $1200) at instant of time ◮ AKMWW: $600 shock (for someone with weekly paycheck) is: Week Amount 1 $35.07 2 $33.09 ... ... 13 $17.39 ... ... ∞ 0 Sum: $600 Is this equivalent to $600 lump sum? ◮ For nondurables spending – see next slides ◮ For durables, surely not:

1. Transitory Shock Possibly more problematic. Take 2008 stimulus checks: ◮ Arrived as a lump sum of $600 (or $1200) at instant of time ◮ AKMWW: $600 shock (for someone with weekly paycheck) is: Week Amount 1 $35.07 2 $33.09 ... ... 13 $17.39 ... ... ∞ 0 Sum: $600 Is this equivalent to $600 lump sum? ◮ For nondurables spending – see next slides ◮ For durables, surely not: ◮ Several papers find lump sums are used as car down payments

1. Transitory Shock Possibly more problematic. Take 2008 stimulus checks: ◮ Arrived as a lump sum of $600 (or $1200) at instant of time ◮ AKMWW: $600 shock (for someone with weekly paycheck) is: Week Amount 1 $35.07 2 $33.09 ... ... 13 $17.39 ... ... ∞ 0 Sum: $600 Is this equivalent to $600 lump sum? ◮ For nondurables spending – see next slides ◮ For durables, surely not: ◮ Several papers find lump sums are used as car down payments ◮ $35.07 (or $70.14) would not suffice!

1. ‘Deaton’ Permanent Income In a certainty equivalent model: � ∞ � � R − n y t + n D t = (1) E t n =0 = (r / R) D t (2) C t ◮ AKMWW ‘transitory’ shock makes D t ↑ by $600

1. ‘Deaton’ Permanent Income In a certainty equivalent model: � ∞ � � R − n y t + n D t = (1) E t n =0 = (r / R) D t (2) C t ◮ AKMWW ‘transitory’ shock makes D t ↑ by $600 ◮ Exactly equivalent to lump sum of $600 if

1. ‘Deaton’ Permanent Income In a certainty equivalent model: � ∞ � � R − n y t + n D t = (1) E t n =0 = (r / R) D t (2) C t ◮ AKMWW ‘transitory’ shock makes D t ↑ by $600 ◮ Exactly equivalent to lump sum of $600 if ◮ Perfect foresight

1. ‘Deaton’ Permanent Income In a certainty equivalent model: � ∞ � � R − n y t + n D t = (1) E t n =0 = (r / R) D t (2) C t ◮ AKMWW ‘transitory’ shock makes D t ↑ by $600 ◮ Exactly equivalent to lump sum of $600 if ◮ Perfect foresight ◮ No liquidity constraints

1. ‘Deaton’ Permanent Income In a certainty equivalent model: � ∞ � � R − n y t + n D t = (1) E t n =0 = (r / R) D t (2) C t ◮ AKMWW ‘transitory’ shock makes D t ↑ by $600 ◮ Exactly equivalent to lump sum of $600 if ◮ Perfect foresight ◮ No liquidity constraints ◮ Perfect capital markets

1. ‘Deaton’ Permanent Income In a certainty equivalent model: � ∞ � � R − n y t + n D t = (1) E t n =0 = (r / R) D t (2) C t ◮ AKMWW ‘transitory’ shock makes D t ↑ by $600 ◮ Exactly equivalent to lump sum of $600 if ◮ Perfect foresight ◮ No liquidity constraints ◮ Perfect capital markets

1. ‘Deaton’ Permanent Income In a certainty equivalent model: � ∞ � � R − n y t + n D t = (1) E t n =0 = (r / R) D t (2) C t ◮ AKMWW ‘transitory’ shock makes D t ↑ by $600 ◮ Exactly equivalent to lump sum of $600 if ◮ Perfect foresight ◮ No liquidity constraints ◮ Perfect capital markets That is, if there is no reason to do any of the incredibly hard and impressive work they do to deal with liquidity constraints, uncertainty, time-varying interest rates, etc etc etc

1. The Good News As ρ 2 ↓ 0 ◮ In theory:

1. The Good News As ρ 2 ↓ 0 ◮ In theory: ◮ AKMWW shock approaches a ‘Friedman’ transitory shock

1. The Good News As ρ 2 ↓ 0 ◮ In theory: ◮ AKMWW shock approaches a ‘Friedman’ transitory shock ◮ In practice, numerics must break down somewhere

1. The Good News As ρ 2 ↓ 0 ◮ In theory: ◮ AKMWW shock approaches a ‘Friedman’ transitory shock ◮ In practice, numerics must break down somewhere ◮ Interesting to know half-life mark where it breaks down

1. The Good News As ρ 2 ↓ 0 ◮ In theory: ◮ AKMWW shock approaches a ‘Friedman’ transitory shock ◮ In practice, numerics must break down somewhere ◮ Interesting to know half-life mark where it breaks down ◮ A week? Indistinguishable from ‘Friedman’ shock

1. The Good News As ρ 2 ↓ 0 ◮ In theory: ◮ AKMWW shock approaches a ‘Friedman’ transitory shock ◮ In practice, numerics must break down somewhere ◮ Interesting to know half-life mark where it breaks down ◮ A week? Indistinguishable from ‘Friedman’ shock ◮ A quarter? Starts to be problematic

1. The Good News As ρ 2 ↓ 0 ◮ In theory: ◮ AKMWW shock approaches a ‘Friedman’ transitory shock ◮ In practice, numerics must break down somewhere ◮ Interesting to know half-life mark where it breaks down ◮ A week? Indistinguishable from ‘Friedman’ shock ◮ A quarter? Starts to be problematic ◮ Say, for analyzing 2008 stimulus

1. The Good News As ρ 2 ↓ 0 ◮ In theory: ◮ AKMWW shock approaches a ‘Friedman’ transitory shock ◮ In practice, numerics must break down somewhere ◮ Interesting to know half-life mark where it breaks down ◮ A week? Indistinguishable from ‘Friedman’ shock ◮ A quarter? Starts to be problematic ◮ Say, for analyzing 2008 stimulus ◮ Summers would not be impressed

1. The Good News As ρ 2 ↓ 0 ◮ In theory: ◮ AKMWW shock approaches a ‘Friedman’ transitory shock ◮ In practice, numerics must break down somewhere ◮ Interesting to know half-life mark where it breaks down ◮ A week? Indistinguishable from ‘Friedman’ shock ◮ A quarter? Starts to be problematic ◮ Say, for analyzing 2008 stimulus ◮ Summers would not be impressed

1. The Good News As ρ 2 ↓ 0 ◮ In theory: ◮ AKMWW shock approaches a ‘Friedman’ transitory shock ◮ In practice, numerics must break down somewhere ◮ Interesting to know half-life mark where it breaks down ◮ A week? Indistinguishable from ‘Friedman’ shock ◮ A quarter? Starts to be problematic ◮ Say, for analyzing 2008 stimulus ◮ Summers would not be impressed Am pretty confident that it can be made to work OK ... ◮ ... with recalibration

1. The Good News As ρ 2 ↓ 0 ◮ In theory: ◮ AKMWW shock approaches a ‘Friedman’ transitory shock ◮ In practice, numerics must break down somewhere ◮ Interesting to know half-life mark where it breaks down ◮ A week? Indistinguishable from ‘Friedman’ shock ◮ A quarter? Starts to be problematic ◮ Say, for analyzing 2008 stimulus ◮ Summers would not be impressed Am pretty confident that it can be made to work OK ... ◮ ... with recalibration ◮ ... and for some Q’s (like stimulus) maybe need 3 not two z ’s

2. Timing of Shocks Frequency of arrival of shocks:

2. Timing of Shocks Frequency of arrival of shocks: Transitory Arrives once every 3 years

2. Timing of Shocks Frequency of arrival of shocks: Transitory Arrives once every 3 years

2. Timing of Shocks Frequency of arrival of shocks: Transitory Arrives once every 3 years Permanent Arrives once every 38 years

2. Timing of Shocks Frequency of arrival of shocks: Transitory Arrives once every 3 years Permanent Arrives once every 38 years Yikes!

2. Timing of Shocks Frequency of arrival of shocks: Transitory Arrives once every 3 years Permanent Arrives once every 38 years Yikes! ◮ Low, Meghir, and Pistaferri (2010): z 2 shocks are mostly:

2. Timing of Shocks Frequency of arrival of shocks: Transitory Arrives once every 3 years Permanent Arrives once every 38 years Yikes! ◮ Low, Meghir, and Pistaferri (2010): z 2 shocks are mostly: ◮ Promotions

2. Timing of Shocks Frequency of arrival of shocks: Transitory Arrives once every 3 years Permanent Arrives once every 38 years Yikes! ◮ Low, Meghir, and Pistaferri (2010): z 2 shocks are mostly: ◮ Promotions ◮ Job Changes

2. Timing of Shocks Frequency of arrival of shocks: Transitory Arrives once every 3 years Permanent Arrives once every 38 years Yikes! ◮ Low, Meghir, and Pistaferri (2010): z 2 shocks are mostly: ◮ Promotions ◮ Job Changes

2. Timing of Shocks Frequency of arrival of shocks: Transitory Arrives once every 3 years Permanent Arrives once every 38 years Yikes! ◮ Low, Meghir, and Pistaferri (2010): z 2 shocks are mostly: ◮ Promotions ◮ Job Changes which happen maybe once every 5 years, not 38

2. Timing of Shocks Frequency of arrival of shocks: Transitory Arrives once every 3 years Permanent Arrives once every 38 years Yikes! ◮ Low, Meghir, and Pistaferri (2010): z 2 shocks are mostly: ◮ Promotions ◮ Job Changes which happen maybe once every 5 years, not 38 ◮ Vast lit: Trans shocks large at annual frequency

Micro: Not Quite There Yet ... Is their description of HH income ‘good enough’? ◮ In short: Not yet.

Micro: Not Quite There Yet ... Is their description of HH income ‘good enough’? ◮ In short: Not yet. ◮ Sim process at HH level, compare results to data

Micro: Not Quite There Yet ... Is their description of HH income ‘good enough’? ◮ In short: Not yet. ◮ Sim process at HH level, compare results to data ◮ Am sure it would make huge miss

Micro: Not Quite There Yet ... Is their description of HH income ‘good enough’? ◮ In short: Not yet. ◮ Sim process at HH level, compare results to data ◮ Am sure it would make huge miss ◮ Good news: With recalibration, it could be serious

Micro: Not Quite There Yet ... Is their description of HH income ‘good enough’? ◮ In short: Not yet. ◮ Sim process at HH level, compare results to data ◮ Am sure it would make huge miss ◮ Good news: With recalibration, it could be serious ◮ Many ‘millions of data points’ papers out there besides GKOS

Micro: Not Quite There Yet ... Is their description of HH income ‘good enough’? ◮ In short: Not yet. ◮ Sim process at HH level, compare results to data ◮ Am sure it would make huge miss ◮ Good news: With recalibration, it could be serious ◮ Many ‘millions of data points’ papers out there besides GKOS ◮ Most of them estimate Friedmanesque process

Micro: Not Quite There Yet ... Is their description of HH income ‘good enough’? ◮ In short: Not yet. ◮ Sim process at HH level, compare results to data ◮ Am sure it would make huge miss ◮ Good news: With recalibration, it could be serious ◮ Many ‘millions of data points’ papers out there besides GKOS ◮ Most of them estimate Friedmanesque process ◮ GKOS specialized in measuring leptokurtosis, recessions, tails

Micro: Not Quite There Yet ... Is their description of HH income ‘good enough’? ◮ In short: Not yet. ◮ Sim process at HH level, compare results to data ◮ Am sure it would make huge miss ◮ Good news: With recalibration, it could be serious ◮ Many ‘millions of data points’ papers out there besides GKOS ◮ Most of them estimate Friedmanesque process ◮ GKOS specialized in measuring leptokurtosis, recessions, tails ◮ They aren’t aiming at any of these targets anyway

Micro: Not Quite There Yet ... Is their description of HH income ‘good enough’? ◮ In short: Not yet. ◮ Sim process at HH level, compare results to data ◮ Am sure it would make huge miss ◮ Good news: With recalibration, it could be serious ◮ Many ‘millions of data points’ papers out there besides GKOS ◮ Most of them estimate Friedmanesque process ◮ GKOS specialized in measuring leptokurtosis, recessions, tails ◮ They aren’t aiming at any of these targets anyway ◮ ⇒ Match rest of literature, not GKOS

Macro: Aggregate C and Y Dynamics Claim to solve two (related) puzzles: 1. Campbell and Deaton (1989): ‘Excess smoothness’: