Reconciling Estimates of Earnings Processes in Growth Rates and Levels

Moira Daly, Dmytro Hryshko, Iourii Manovskii

Publikation: Bidrag til konferencePaperForskning

Resumé

The stochastic process for earnings is the key element of incomplete markets models in modern quantitative macroeconomics. It determines both the equilibrium distributions of endogenous outcomes and the design of optimal policies. Yet, there is no consensus in the literature on the relative magnitudes of the permanent and transitory innovations in earnings. When estimation is based on the earnings moments in levels, the variance of transitory shocks is found to be relatively high. When the moments in differences are used, the variance of the permanent component is relatively
high instead. We show theoretically that the difference can be induced by the fact that earnings at the start or at the end of earnings spells are lower and more volatile than the observations in the interior of earnings histories. Using large administrative datasets from Denmark and Germany, we show that this property of earnings spells quantitatively accounts for the full amount of discrepancy in the estimates. Using data from the Panel Study of Income Dynamics, we show that this property of earnings induces a substantial upward bias in the estimate of consumption insurance against permanent shocks.
The stochastic process for earnings is the key element of incomplete markets models in modern quantitative macroeconomics. It determines both the equilibrium distributions of endogenous outcomes and the design of optimal policies. Yet, there is no consensus in the literature on the relative magnitudes of the permanent and transitory innovations in earnings. When estimation is based on the earnings moments in levels, the variance of transitory shocks is found to be relatively high. When the moments in differences are used, the variance of the permanent component is relatively
high instead. We show theoretically that the difference can be induced by the fact that earnings at the start or at the end of earnings spells are lower and more volatile than the observations in the interior of earnings histories. Using large administrative datasets from Denmark and Germany, we show that this property of earnings spells quantitatively accounts for the full amount of discrepancy in the estimates. Using data from the Panel Study of Income Dynamics, we show that this property of earnings induces a substantial upward bias in the estimate of consumption insurance against permanent shocks.

Konference

KonferenceFourth Conference on Household Finance and Consumption 2015
Nummer4
LokationECB Main Building
LandTyskland
ByFrankfurt am Main
Periode17/12/201518/12/2015
Internetadresse

Citer dette

Daly, M., Hryshko, D., & Manovskii, I. (2015). Reconciling Estimates of Earnings Processes in Growth Rates and Levels. Afhandling præsenteret på Fourth Conference on Household Finance and Consumption 2015, Frankfurt am Main, Tyskland.
Daly, Moira ; Hryshko, Dmytro ; Manovskii, Iourii. / Reconciling Estimates of Earnings Processes in Growth Rates and Levels. Afhandling præsenteret på Fourth Conference on Household Finance and Consumption 2015, Frankfurt am Main, Tyskland.49 s.
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abstract = "The stochastic process for earnings is the key element of incomplete markets models in modern quantitative macroeconomics. It determines both the equilibrium distributions of endogenous outcomes and the design of optimal policies. Yet, there is no consensus in the literature on the relative magnitudes of the permanent and transitory innovations in earnings. When estimation is based on the earnings moments in levels, the variance of transitory shocks is found to be relatively high. When the moments in differences are used, the variance of the permanent component is relativelyhigh instead. We show theoretically that the difference can be induced by the fact that earnings at the start or at the end of earnings spells are lower and more volatile than the observations in the interior of earnings histories. Using large administrative datasets from Denmark and Germany, we show that this property of earnings spells quantitatively accounts for the full amount of discrepancy in the estimates. Using data from the Panel Study of Income Dynamics, we show that this property of earnings induces a substantial upward bias in the estimate of consumption insurance against permanent shocks.",
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Daly, M, Hryshko, D & Manovskii, I 2015, 'Reconciling Estimates of Earnings Processes in Growth Rates and Levels' Paper fremlagt ved Fourth Conference on Household Finance and Consumption 2015, Frankfurt am Main, Tyskland, 17/12/2015 - 18/12/2015, .

Reconciling Estimates of Earnings Processes in Growth Rates and Levels. / Daly, Moira; Hryshko, Dmytro; Manovskii, Iourii.

2015. Afhandling præsenteret på Fourth Conference on Household Finance and Consumption 2015, Frankfurt am Main, Tyskland.

Publikation: Bidrag til konferencePaperForskning

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T1 - Reconciling Estimates of Earnings Processes in Growth Rates and Levels

AU - Daly,Moira

AU - Hryshko,Dmytro

AU - Manovskii,Iourii

PY - 2015

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N2 - The stochastic process for earnings is the key element of incomplete markets models in modern quantitative macroeconomics. It determines both the equilibrium distributions of endogenous outcomes and the design of optimal policies. Yet, there is no consensus in the literature on the relative magnitudes of the permanent and transitory innovations in earnings. When estimation is based on the earnings moments in levels, the variance of transitory shocks is found to be relatively high. When the moments in differences are used, the variance of the permanent component is relativelyhigh instead. We show theoretically that the difference can be induced by the fact that earnings at the start or at the end of earnings spells are lower and more volatile than the observations in the interior of earnings histories. Using large administrative datasets from Denmark and Germany, we show that this property of earnings spells quantitatively accounts for the full amount of discrepancy in the estimates. Using data from the Panel Study of Income Dynamics, we show that this property of earnings induces a substantial upward bias in the estimate of consumption insurance against permanent shocks.

AB - The stochastic process for earnings is the key element of incomplete markets models in modern quantitative macroeconomics. It determines both the equilibrium distributions of endogenous outcomes and the design of optimal policies. Yet, there is no consensus in the literature on the relative magnitudes of the permanent and transitory innovations in earnings. When estimation is based on the earnings moments in levels, the variance of transitory shocks is found to be relatively high. When the moments in differences are used, the variance of the permanent component is relativelyhigh instead. We show theoretically that the difference can be induced by the fact that earnings at the start or at the end of earnings spells are lower and more volatile than the observations in the interior of earnings histories. Using large administrative datasets from Denmark and Germany, we show that this property of earnings spells quantitatively accounts for the full amount of discrepancy in the estimates. Using data from the Panel Study of Income Dynamics, we show that this property of earnings induces a substantial upward bias in the estimate of consumption insurance against permanent shocks.

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Daly M, Hryshko D, Manovskii I. Reconciling Estimates of Earnings Processes in Growth Rates and Levels. 2015. Afhandling præsenteret på Fourth Conference on Household Finance and Consumption 2015, Frankfurt am Main, Tyskland.