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A Tractable Income Process for Business Cycle Analysis

Author

Listed:
  • Fatih Guvenen

    (University of Toronto)

  • Alisdair McKay

    (Federal Reserve Bank of Minneapolis)

  • Conor Ryan

    (Penssylvania State University)

Abstract

We estimate a tractable income process that is consistent with key facts on individual income risk and its variation over the business cycle. In particular, the estimated process generates income fluctuations that display (i) flat and acyclical variance, (ii) volatile and procyclical skewness, (iii) very high kurtosis, and (iv) a moderate rise in within-cohort inequality over the life cycle, all consistent with the US data. Furthermore, the income process captures the predictable nature of business cycle income risk: income changes during a business cycle episode are partly predicted by income levels before that episode. The estimated process features a time-varying distribution of innovations as well as a factor structure for business cycle exposure. Incorporating the estimated process into a business cycle model adds only one state variable—as in the workhorse persistent-plus-transitory income process—making it a tractable option for modelers. (Copyright: Elsevier)

Suggested Citation

  • Fatih Guvenen & Alisdair McKay & Conor Ryan, 2026. "A Tractable Income Process for Business Cycle Analysis," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 61, August.
    • Handle: RePEc:red:issued:25-34
    DOI: 10.1016/j.red.2026.101345
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    Keywords

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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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