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Capital Income Risk and the Dynamics of the Wealth Distribution

Author

Listed:
  • Hoang Khieu

    (Johannes Gutenberg-University)

  • Klaus Wälde

    (Johannes Gutenberg-University)

Abstract

In this paper, we develop and nummerically solve a model of idiosyncratic labour income and idiosyncratic interest rates to predict the evolution of a wealth dirstribution over time. Stochastic labour income follows a deterministic growth trend and it fluctuaues between a wage and unempolyment benefits. Stochastic interst 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 distribution. 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 empirical standard deviation.

Suggested Citation

  • Hoang Khieu & Klaus Wälde, 2018. "Capital Income Risk and the Dynamics of the Wealth Distribution," Working Papers 1814, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz.
    • Handle: RePEc:jgu:wpaper:1814
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    Cited by:

    1. Donsimoni Jean Roch & Glawion René & Plachter Bodo & Wälde Klaus, 2020. "Projecting the spread of COVID-19 for Germany," German Economic Review, De Gruyter, vol. 21(2), pages 181-216, June.
    2. Stephen Snudden, 2024. "Leverage and Rate of Return Heterogeneity Among U.S. Households," LCERPA Working Papers jc0150, Laurier Centre for Economic Research and Policy Analysis, revised Dec 2024.
    3. Juan Carlos Parra‐Alvarez & Olaf Posch & Mu‐Chun Wang, 2023. "Estimation of Heterogeneous Agent Models: A Likelihood Approach," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(2), pages 304-330, April.
    4. Bayer, Christian & Rendall, Alan D. & Wälde, Klaus, 2019. "The invariant distribution of wealth and employment status in a small open economy with precautionary savings," Journal of Mathematical Economics, Elsevier, vol. 85(C), pages 17-37.
    5. Juan Carlos Parra-Alvarez & Olaf Posch & Mu-Chun Wang, 2017. "Estimation of Heterogeneous Agent Models: A Likelihood Approach," CESifo Working Paper Series 6717, CESifo.
    6. Hoang Van Khieu & Roberto Leon-Gonzalez, 2024. "The distributions of annual earnings and interest rates in a continuous time Markov chain economy," Economics Bulletin, AccessEcon, vol. 44(3), pages 1096-1108.
    7. Glawion, Rene & Puche, Marc & Haller, Frédéric, 2020. "A General Equilibrium Model of Earnings, Income, and Wealth," VfS Annual Conference 2020 (Virtual Conference): Gender Economics 224580, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

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    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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