IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2607.15168.html

Indirect Variational Inference: Applications to Earnings Dynamics

Author

Listed:
  • Neele Balke
  • Stephane Bonhomme
  • Thibaut Lamadon

Abstract

Latent-variable models are central to economics but often entail intractable integration. Variational inference (VI), widely used in machine learning, turns this integration into tractable, differentiable optimization by replacing the likelihood with a variational objective. However, guarantees of recovering the true parameters remain limited when the variational family is insufficiently flexible -- a key obstacle to the adoption of VI in economics. We first evaluate VI in models of earnings dynamics and show that the choice of variational posterior is crucial. We then introduce indirect variational inference (IVI), which treats VI as an auxiliary model and corrects the bias induced by the variational approximation. IVI retains much of VI's tractability because it does not require computing the likelihood. We apply these methods to models allowing for nonlinear persistence, non-Gaussian and serially correlated transitory shocks, and latent heterogeneity. Across simulated and empirical applications, flexible variational families combined with IVI deliver reliable estimates.

Suggested Citation

  • Neele Balke & Stephane Bonhomme & Thibaut Lamadon, 2026. "Indirect Variational Inference: Applications to Earnings Dynamics," Papers 2607.15168, arXiv.org.
  • Handle: RePEc:arx:papers:2607.15168
    as

    Download full text from publisher

    File URL: https://arxiv.org/pdf/2607.15168
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Smith, A A, Jr, 1993. "Estimating Nonlinear Time-Series Models Using Simulated Vector Autoregressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(S), pages 63-84, Suppl. De.
    2. Costas Meghir & Luigi Pistaferri, 2004. "Income Variance Dynamics and Heterogeneity," Econometrica, Econometric Society, vol. 72(1), pages 1-32, January.
    3. Tetsuya Kaji & Elena Manresa & Guillaume Pouliot, 2023. "An Adversarial Approach to Structural Estimation," Econometrica, Econometric Society, vol. 91(6), pages 2041-2063, November.
    4. David M. Blei & Alp Kucukelbir & Jon D. McAuliffe, 2017. "Variational Inference: A Review for Statisticians," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 112(518), pages 859-877, April.
    5. Chan, Joshua C.C. & Yu, Xuewen, 2022. "Fast and Accurate Variational Inference for Large Bayesian VARs with Stochastic Volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    6. Angelo Mele & Lingjiong Zhu, 2023. "Approximate Variational Estimation for a Model of Network Formation," The Review of Economics and Statistics, MIT Press, vol. 105(1), pages 113-124, January.
    7. Lillard, Lee A & Willis, Robert J, 1978. "Dynamic Aspects of Earning Mobility," Econometrica, Econometric Society, vol. 46(5), pages 985-1012, September.
    8. Arellano, Manuel & Blundell, Richard & Bonhomme, Stéphane & Light, Jack, 2024. "Heterogeneity of consumption responses to income shocks in the presence of nonlinear persistence," Journal of Econometrics, Elsevier, vol. 240(2).
    9. Abowd, John M & Card, David, 1989. "On the Covariance Structure of Earnings and Hours Changes," Econometrica, Econometric Society, vol. 57(2), pages 411-445, March.
    10. Mariacristina De Nardi & Giulio Fella & Gonzalo Paz-Pardo, 2020. "Nonlinear Household Earnings Dynamics, Self-Insurance, and Welfare," Journal of the European Economic Association, European Economic Association, vol. 18(2), pages 890-926.
    11. Manuel Arellano & Richard Blundell & Stéphane Bonhomme, 2017. "Earnings and Consumption Dynamics: A Nonlinear Panel Data Framework," Econometrica, Econometric Society, vol. 85, pages 693-734, May.
    12. Yixin Wang & David M. Blei, 2019. "Frequentist Consistency of Variational Bayes," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 114(527), pages 1147-1161, July.
    13. Rubén Loaiza-Maya & Didier Nibbering, 2023. "Fast Variational Bayes Methods for Multinomial Probit Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 41(4), pages 1352-1363, October.
    14. Drew Creal, 2012. "A Survey of Sequential Monte Carlo Methods for Economics and Finance," Econometric Reviews, Taylor & Francis Journals, vol. 31(3), pages 245-296.
    15. Gallant, A. Ronald & Tauchen, George, 1996. "Which Moments to Match?," Econometric Theory, Cambridge University Press, vol. 12(4), pages 657-681, October.
    16. Stephane Bonhomme, 2021. "Teams: Heterogeneity, Sorting, and Complementarity," Papers 2102.01802, arXiv.org.
    17. Yingyao Hu & Susanne M. Schennach, 2008. "Instrumental Variable Treatment of Nonclassical Measurement Error Models," Econometrica, Econometric Society, vol. 76(1), pages 195-216, January.
    18. Fatih Guvenen & Fatih Karahan & Serdar Ozkan & Jae Song, 2021. "What Do Data on Millions of U.S. Workers Reveal About Lifecycle Earnings Dynamics?," Econometrica, Econometric Society, vol. 89(5), pages 2303-2339, September.
    19. Manuel Arellano, 2014. "Uncertainty, Persistence, And Heterogeneity: A Panel Data Perspective," Journal of the European Economic Association, European Economic Association, vol. 12(5), pages 1127-1153, October.
    20. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, vol. 98(5), pages 1887-1921, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Joseph Altonji & Disa Hynsjo & Ivan Vidangos, 2023. "Individual Earnings and Family Income: Dynamics and Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 49, pages 225-250, July.
    2. Koray Aktaş, 2025. "Characterising life-cycle dynamics of annual days of work, wages, and cross-covariances," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 23(2), pages 571-604, June.
    3. Manuel Arellano & Orazio Attanasio & Margherita Borella & Mariacristina De Nardi & Gonzalo Paz-Pardo, 2026. "Subjective Earnings and Employment Dynamics," NBER Working Papers 35027, National Bureau of Economic Research, Inc.
    4. Joseph G. Altonji & Anthony A. Smith Jr. & Ivan Vidangos, 2013. "Modeling Earnings Dynamics," Econometrica, Econometric Society, vol. 81(4), pages 1395-1454, July.
    5. Sagiri KITAO & Michio SUZUKI & Tomoaki YAMADA, 2025. "Nonlinear Earnings Dynamics and Inequality over the Life Cycle: Evidence from Japanese Municipal Tax Records," Discussion papers 25081, Research Institute of Economy, Trade and Industry (RIETI).
    6. Theloudis, Alexandros, 2021. "Consumption inequality across heterogeneous families," European Economic Review, Elsevier, vol. 136(C).
    7. Manuel Arellano & Stéphane Bonhomme & Micole De Vera & Laura Hospido & Siqi Wei, 2022. "Income risk inequality: Evidence from Spanish administrative records," Quantitative Economics, Econometric Society, vol. 13(4), pages 1747-1801, November.
    8. Tao Wang, 2023. "Perceived versus Calibrated Income Risks in Heterogeneous-Agent Consumption Models," Staff Working Papers 23-59, Bank of Canada.
    9. Manuel Arellano & Richard Blundell & Stéphane Bonhomme, 2017. "Earnings and Consumption Dynamics: A Nonlinear Panel Data Framework," Econometrica, Econometric Society, vol. 85, pages 693-734, May.
    10. Arellano, Manuel & Blundell, Richard & Bonhomme, Stéphane & Light, Jack, 2024. "Heterogeneity of consumption responses to income shocks in the presence of nonlinear persistence," Journal of Econometrics, Elsevier, vol. 240(2).
    11. Costanza Naguib & Patrick Gagliardini, 2023. "A Semi-nonparametric Copula Model for Earnings Mobility," Diskussionsschriften dp2302, Universitaet Bern, Departement Volkswirtschaft.
    12. Ivan Vidangos, 2009. "Household welfare, precautionary saving, and social insurance under multiple sources of risk," Finance and Economics Discussion Series 2009-14, Board of Governors of the Federal Reserve System (U.S.).
    13. Bagliano, Fabio C. & Fugazza, Carolina & Nicodano, Giovanna, 2024. "Life-cycle risk-taking with personal disaster risk," International Review of Economics & Finance, Elsevier, vol. 89(PB), pages 378-396.
    14. Inkmann, Joachim, 2024. "Aggregate portfolio choice," Journal of Empirical Finance, Elsevier, vol. 77(C).
    15. Martin Browning & Mette Ejrnæs & Javier Alvarez, 2010. "Modelling Income Processes with Lots of Heterogeneity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(4), pages 1353-1381.
    16. Masakatsu Okubo, 2015. "Earnings Dynamics and Profile Heterogeneity: Estimates from Japanese Panel Data," The Japanese Economic Review, Japanese Economic Association, vol. 66(1), pages 112-146, March.
    17. Elin Halvorsen & Hans A Holter & Serdar Ozkan & Kjetil Storesletten, 2024. "Dissecting Idiosyncratic Earnings Risk," Journal of the European Economic Association, European Economic Association, vol. 22(2), pages 617-668.
    18. Lance Lochner & Youngki Shin, 2014. "Understanding Earnings Dynamics: Identifying and Estimating the Changing Roles of Unobserved Ability, Permanent and Transitory Shocks," NBER Working Papers 20068, National Bureau of Economic Research, Inc.
    19. Gizem Koşar & Wilbert van der Klaauw, 2025. "Workers’ Perceptions of Earnings Growth and Employment Risk," Journal of Labor Economics, University of Chicago Press, vol. 43(S1), pages 83-121.
    20. Crawley, Edmund & Theloudis, Alexandros, 2024. "Income Shocks and their Transmission into Consumption," Discussion Paper 2024-012, Tilburg University, Center for Economic Research.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2607.15168. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: https://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.