Presented By: Department of Economics
Nonlinear Micro Income Processes with Macro Shocks, joint with Martin Almuzara, Manuel Arellano, and Richard Blundell
Stephane Bonhomme, University of Chicago

We propose a nonlinear framework to study the dynamic transmission of aggregate and idiosyncratic shocks to household income that exploits both macro and micro data. Combining macro time series for the U.S. and a time series of household panels from the PSID, we find that business-cycle fluctuations modulate the persistence of heterogeneous individual histories and the risk faced by households. We document how aggregate and idiosyncratic shocks propagate over time for households in dif- ferent macro and micro states. Lastly, we quantify the welfare cost of aggregate and idiosyncratic risk.