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The distributions of annual earnings and interest rates in a continuous time Markov chain economy

Author

Listed:
  • Hoang Van Khieu

    (Fulbright University Vietnam)

  • Roberto Leon-Gonzalez

    (National Graduate Institute for Policy Studies)

Abstract

In this note, we show that two-state continuous time Markov processes can generate empirically plausible distributions of annual earnings and interest rates. Annual earnings and interest rates in continuous time models are functions of a path integral over the instantaneous values and therefore continuously distributed. We develop an algorithm computing the cross-sectional distributions of annual earnings and interest rates. This algorithm can be used to simulate annual income and interest rates in continuous time models or calibrate the fundamental parameters of the continuous time Markov processes.

Suggested Citation

  • Hoang Van Khieu & Roberto Leon-Gonzalez, 2024. "The distributions of annual earnings and interest rates in a continuous time Markov chain economy," Economics Bulletin, AccessEcon, vol. 44(3), pages 1096-1108.
    • Handle: RePEc:ebl:ecbull:eb-24-00201
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    path integral; continuous time Markov process; annual interest rate; annual earnings;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D3 - Microeconomics - - Distribution

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