Alexander Ludwig Visits the Universitat Autònoma de Barcelona

Alexander Ludwig worked with Christopher Busch on the Norface DIAL project “Trends in Inequality: Sources and Politics” in Barcelona

Alexander Ludwig, Program Director for "Macro Finance – Monetary Policy and Fiscal Stability" at the Research Center SAFE continued working on the project “Trends in Inequality: Sources and Policy” with Christopher Busch who is Assistant Professor at Universitat Autònoma de Barcelona.

Ludwig visited Busch from 30 November to 4 December 2018 in Barcelona. Both researchers are team members of the Norface DIAL project. It aims to develop structural household life-cycle models in macroeconomic environments to evaluate the effects of inequality in income, wealth, hours worked and consumption on welfare, and to quantitatively decompose the trends in inequality into their various sources.

During the stay, they have worked on their project output “Higher-Order Income Risk over the Business Cycle: A Parametric Approach“. In the paper, Ludwig and Busch develop a novel parametric approach to estimate the relationship between idiosyncratic and aggregate labor income risk. They derive closed-form expressions for the variance and skewness of persistent and transitory income shocks and achieve identification in a “Generalized Method of Moments” (GMM) framework. 

Ludwig and Busch apply their method to German and US household data. For both Germany and the US, findings show the skewness of persistent income changes to be procyclical, and the variance to be countercyclical. The existing tax and transfer schemes reduce this cyclicality, and also reduce dispersion and left-skewness of transitory shocks. The authors show how the estimated process can be discretized and mapped into standard calibrated macroeconomic models. As an illustration of the approach, they develop a partial equilibrium life-cycle model of consumption and savings with exogenous earnings processes, which they employ to quantitatively evaluate the role of skewness estimates of persistent and transitory shocks for the pass-through of income shocks to consumption and for the welfare costs of aggregate fluctuations.

Christopher Busch is a Research Fellow at MOVE, and an Affiliated Professor at the Barcelona GSE and also a Junior Fellow of SAFE. Busch works in the fields of Macroeconomics and Labor Economics, using parametric and non-parametric empirical methods together with quantitative structural models to address questions of labor income dynamics, insurance against income risk, and labor market mobility.