Power Law Tails in the Italian Personal Income Distribution

We investigate the shape of the Italian personal income distribution using microdata from the Survey on Household Income and Wealth, made publicly available by the Bank of Italy for the years 1977-2002. We find that the upper tail of the distribution is consistent with a Pareto power-law type distribution, while the rest follows a two-parameter lognormal distribution. The results of our analysis show a shift of the distribution and a change of the indexes specifying it over time. As regards the first issue, we test the hypothesis that the evolution of both gross domestic product and personal income is governed by similar mechanisms, pointing to the existence of correlation between these quantities. The fluctuations of the shape of income distribution are instead quantified by establishing some links with the business cycle phases experienced by the Italian economy over the years covered by our dataset.Personal income; Pareto law; Lognormal distribution; Income growth rate; Business cycle

Heavy-tailed distributions for agent-based economic modelling

This chapter is devoted to the parametric statistical distributions of economic size phenomena of various types. Probability distributions of size variables are usually taken as the first quantitative characterization of complex systems, allowing one to detect the possible occurrence of regularities and to identify the underlying mechanisms at their origin - and thus at the origin of the behaviour of the complex system under study. A rapid survey covers the class of "heavy-tailed" distributions decreasing slower than exponentially at infinity. The fascination for "power laws" is then explained, starting from the statistical approaches for quantifying and testing a power-law distribution from your data, and ending with a (not exhaustive) list of mechanisms leading to power-law distributions. The description of distributions is ultimately enlarged by proposing the Laplace distribution, which has both tails - the upper and the lower - heavier than a standard Gaussian

A Big Mac test of price dynamics and dispersion across euro area

Based on the prices of McDonald's Big Mac hamburger in 11 Eurozone countries over the 1986–2009 period, the present article investigates whether the adoption of the euro was accompanied by an increase in inflation and how far it affected developments in price dispersion. Our results indicate that the Eurozone inflation rate after the introduction of the euro is on average significantly higher than prior to the changeover. Additionally, we find no evidence of a further significant reduction in price dispersion since the euro switchover in comparison with the previous period during which progress towards a leveling of existing price differentials had been made.Euro, inflation, price dispersion, Big Mac

The distribution of income and wealth: parametric modeling with the \u3ba-generalized family

This book presents a systematic overview of cutting-edge research in the field of parametric modeling of personal income and wealth distribution, which allows one to represent how income/wealth is distributed within a given population. The estimated parameters may be used to gain insights into the causes of the evolution of income/wealth distribution over time, or to interpret the differences between distributions across countries. Moreover, once a given parametric model has been fitted to a data set, one can straightforwardly compute inequality and poverty measures. Finally, estimated parameters may be used in empirical modeling of the impact of macroeconomic conditions on the evolution of personal income/wealth distribution. In reviewing the state of the art in the field, the authors provide a thorough discussion of parametric models belonging to the "\u3ba-generalized" family, a new and fruitful set of statistical models for the size distribution of income and wealth that they have developed over several years of collaborative and multidisciplinary research. This book will be of interest to all who share the belief that problems of income and wealth distribution merit detailed conceptual and methodological attention

Modeling the joint distribution of income and consumption in Italy: a copula-based approach with \u3ba-generalized margins

This chapter elaborates a new parametric model for the joint distribution of income and consumption. The model combines estimates for the marginal distributions of income and consumption and a parametric copula function to capture the dependence structure between the two variates. Specifically, we apply the "symmetrized Joe-Clayton" copula to model the dependence between income and consumption margins whose non-identical distributions belong to the "\u3ba-generalized" family. Using data from the Bank of Italy's Survey on Household Income and Wealth for the period 1987-2014, we find that the proposed copula-based approach accounts well for the complex dependence between income and consumption observed in our samples. The chapter also points to further developments that are specific to the field of welfare economics

All that glitters is not gold: polarization amid poverty reduction in Ghana

Ghana is an exceptional case in the Sub-Saharan Africa landscape. Together with a handful of other countries, Ghana offers the opportunity to analyze the distributional changes in the past two decades, since four comparable household surveys are available. In addition, different from many other countries in the continent, Ghana's rapid growth translated into fast poverty reduction. A closer look at the distributional changes that occurred in the same period, however, suggests less optimism. The present paper develops an innovative methodology to analyze the distributional changes that occurred and their drivers, with a high degree of accuracy and granularity. Looking at the results from 1991 to 2012, the paper documents how the distributional changes hollowed out the middle of the Ghanaian household consumption distribution and increased the concentration of households around the highest and lowest deciles; there was a clear surge in polarization indeed. When looking at the drivers of polarization, household characteristics, educational attainment, and access to basic infrastructure all tended to increase over time the size of the upper and lower tails of the consumption distribution and, as a consequence, the degree of polarization

All that glitters is not gold: polarization amid poverty reduction in Ghana

Ghana is an exceptional case in the Sub-Saharan Africa (SSA) landscape. Together with a handful of other countries, Ghana offers the opportunity to analyze the distributional changes in the past two decades, since four comparable household surveys are available. In addition, unlike many other countries in SSA, Ghana's rapid growth translated into fast poverty reduction. A closer look at the distributional changes that occurred in the same period, however, suggests less optimism. The present paper develops an innovative methodology to analyze the distributional changes that occurred and their drivers, with a high degree of accuracy and granularity. Looking at the results from 1991 to 2012, the paper documents how the distributional changes over time hollowed out the middle of the Ghanaian household consumption distribution and increased the concentration of households around the highest and lowest deciles; there was a clear surge in polarization indeed. When looking at the drivers of polarization, household characteristics, educational attainment, and access to basic infrastructure all tended to increase over time the size of the upper and lower tails of the consumption distribution and, as a consequence, the degree of polarization

Financial cycles, credit networks and macroeconomic fluctuations: multi-scale stochastic models and wavelet analysis

This project focuses on the macroeconomics of financial cycles. Usually defined in terms of self-reinforcing interactions between perceptions of value and risk, attitudes towards risk and financing constraints, which translate into booms followed by bust, the recent empirical literature has recurred to two approaches \u2013 turning point analysis and frequency-based filters - applied to measures of credit and asset prices to pose a number of stylized facts. First, financial cycles tend to display a greater amplitude and a lower frequency in comparison to business cycles, with peaks associated with systemic crises. Second, financial cycles depend on policy regimes and on the pace of financial innovations, leading to a wide cross-country heterogeneity and a time-varying degree of global synchronization. The latter point is clearly related to the structural transformations occurred in financial systems over the last three decades, like the cumulative integration of traditional banking with capital market developments and the increasing degree of interconnections among financial institutions. However, to date very little is known about determinants and mechanisms behind financial cycles, and on how they interact with business cycles and medium-to-long-run macroeconomic performance. In this project we plan to research along three dimensions: i) measurement issues, in order to provide a comprehensive assessment of the evolution of co-movements between financial and real variables across a sample of financial developed countries, both over time and at different frequencies; ii) theoretical issues, aimed at exploring under what circumstances the network of interconnections among financial intermediaries and between intermediaries and non-financial borrowers might evolve cyclically, contributing this way to regulate the incentives agents have in taking risks, and to set the importance of credit and financial frictions in accounting for time-varying misallocations of resources; iii) policy issues, given the role assigned by international supervisory bodies to a proper characterization and knowledge of the financial cycle as a prerequisite for the macro-prudential regulation of banks, and the scope of monetary policy in promoting financial stability in addition to the typical mandate of price stability. Our task requires the employment of a new approach to macroeconomic analysis, diverse analytical tools and one unifying economic principle. As regards the latter, our focal point is the notion of risk externalities, across financial institutions and between the financial sector and the real economy. The set of tools we plan to employ spans from wavelets methods to multi-scale models in continuous time, and from strategic network formation to agent-based computational techniques. All these tools are instrumental in building and estimating macroeconomic models characterized by interrelated markets operating at different time scales

New economic windows on income and wealth: the \u3ba-generalized family of distributions

Over the last decades, the distribution of income and wealth has been deteriorating in many countries, leading to increased inequalities within and between societies. This tendency has revived the interest in the subject greatly, yet it still receives very little attention within the realm of mainstream economic thinking. One reason for this is that the basic paradigm of "standard economics", the representative-agent General Equilibrium framework, is badly equipped to cope with distributional issues. Here we argue that when the economy is treated as a complex system composed of many heterogeneous interacting agents who give rise to emergent phenomena, to address the main stylized facts of income/wealth distribution requires leaving the toolbox of mainstream economics in favour of alternative approaches. The "\u3ba-generalized" family of income/wealth distributions, building on the categories of complexity, is an example of how advances in the field can be achieved within new interdisciplinary research contexts

New economic windows on income and wealth: the κ-generalized family of distributions

Over the last decades, the distribution of income and wealth has been deteriorating in many countries, leading to increased inequalities within and between societies. This tendency has revived the interest in the subject greatly, yet it still receives very little attention within the realm of mainstream economic thinking. One reason for this is that the basic paradigm of "standard economics", the representative-agent General Equilibrium framework, is badly equipped to cope with distributional issues. Here we argue that when the economy is treated as a complex system composed of many heterogeneous interacting agents who give rise to emergent phenomena, to address the main stylized facts of income/wealth distribution requires leaving the toolbox of mainstream economics in favour of alternative approaches. The "κ-generalized" family of income/wealth distributions, building on the categories of complexity, is an example of how advances in the field can be achieved within new interdisciplinary research contexts