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Towards a HANK Model for Canada: Estimating a Canadian Income Process

Author

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  • Iskander Karibzhanov
Abstract
I study individual earnings dynamics using panel data on Canadian workers. I first show that, similar to US findings, the distribution of Canadian income growth is leptokurtic. To generate such high kurtosis, I use a common continuous-time specification of the individual earnings as a stochastic process with a random (Poisson) arrival of normally distributed jumps. The fitted earnings process matches the eight targeted moments well. The estimated parameter values are consistent with the existence of both transitory and persistent components in earnings. On the methodological side, I show how the estimation process can be accelerated significantly by parallelizing Monte Carlo simulations on graphical processing units with massive savings in computational time. My estimates represent a key first step in developing quantitatively realistic Heterogeneous Agent New Keynesian (HANK) models for the Canadian economy. HANK models are important tools for understanding consumption behaviour and analyzing the transmission mechanism for monetary policy. The estimated process in this paper may prove useful in other contexts where an empirically realistic representation of household earnings dynamics is vital.

Suggested Citation

  • Iskander Karibzhanov, 2020. "Towards a HANK Model for Canada: Estimating a Canadian Income Process," Discussion Papers 2020-13, Bank of Canada.
    • Handle: RePEc:bca:bocadp:20-13
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    References listed on IDEAS

    as
    1. Fatih Guvenen & Fatih Karahan & Serdar Ozkan & Jae Song, 2015. "What Do Data on Millions of U.S. Workers Reveal about Life-Cycle Earnings Risk?," NBER Working Papers 20913, National Bureau of Economic Research, Inc.
    2. Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2018. "Monetary Policy According to HANK," American Economic Review, American Economic Association, vol. 108(3), pages 697-743, March.
    3. Philippe Pébay & Timothy B. Terriberry & Hemanth Kolla & Janine Bennett, 2016. "Numerically stable, scalable formulas for parallel and online computation of higher-order multivariate central moments with arbitrary weights," Computational Statistics, Springer, vol. 31(4), pages 1305-1325, December.
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    Cited by:

    1. Edouard Djeutem & Mario He & Abeer Reza & Yang Zhang, 2022. "Household Heterogeneity and the Performance of Monetary Policy Frameworks," Staff Working Papers 22-12, Bank of Canada.

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    More about this item

    Keywords

    Economic models; Labour markets;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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