Capital Income Risk and the Dynamics of the Wealth Distribution
35 Pages Posted: 12 Dec 2019
Date Written: 2019
Labour income follows a deterministic growth trend and fluctuates between two values. Interest rates are drawn initially, fluctuate between two values and can differ in their arrival rates. Low interest rates imply a stationary long-run wealth distribution, high interest rates imply exploding wealth dynamics. When matching the NLSY 79 evolution of the wealth distribution from 1986 to 2008, we obtain a fit of 96:1%: With a more flexible interest rate distribution, employing "superstar states", the fit can increase to 96:7%. For the fit of 96:1%, the standard deviation of model returns is much lower than the empirical standard deviation.
Keywords: dynamics of wealth distributions, NLSY 1979 cohort, capital income risk, Fokker-Planck equations
JEL Classification: C600, D300, E200
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