A Parsimonious Model of Idiosyncratic Income

Principal Investigator(s):  View help for Principal Investigator(s) Edmund Crawley, Federal Reserve Board; Hakon Tretvoll, Statistics Norway; Martin Holm, University of Oslo

Version:  View help for Version V2

Name File Type Size Last Modified
CHT_Income.zip application/zip 97.6 MB 11/04/2025 04:08:PM

Project Citation: 

Crawley, Edmund, Tretvoll, Hakon, and Holm, Martin. A Parsimonious Model of Idiosyncratic Income. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2025-12-01. https://doi.org/10.3886/E239687V2

Project Description

Summary:  View help for Summary The standard permanent and transitory income model is known to be misspecified. Estimates of income volatility within this model differ depending on the specific data moments used -- whether they are in levels or differences -- and how these moments are weighted during estimation. We suggest a simple modification to the standard model: Allowing for two transitory shocks that persist for different lengths of time. Our proposed model, which introduces only one additional parameter, consistently and accurately identifies the parameters of the income process, regardless of the estimation method used.



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V2 [2025-12-01]

V1 [2025-11-04]

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