Macroeconomic Dynamics

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GROWTH AND INEQUALITY: MODEL EVALUATION BASED ON AN ESTIMATION-CALIBRATION STRATEGY

Hyeok Jeonga1 c1 and Robert M. Townsenda2

a1 University of Southern California

a2 University of Chicago

Abstract

This paper evaluates two well-known models of growth with inequality that have explicit micro underpinnings related to household choice. With incomplete markets or transactions costs, wealth can constrain investment in business and the choice of occupation and also constrain the timing of entry into the formal financial sector. Using the Thai Socio-Economic Survey (SES), we estimate the distribution of wealth and the key parameters that best fit cross-sectional data on household choices and wealth. We then simulate the model economies for two decades at the estimated initial wealth distribution and analyze whether the model economies at those micro-fit parameter estimates can explain the observed macro and sectoral aspects of income growth and inequality change. Both models capture important features of Thai reality. Anomalies and comparisons across the two distinct models yield specific suggestions for improved research on the micro foundations of growth and inequality.

Keywords:

  • Growth and Inequality;
  • Wealth-Constraints;
  • Self-Selection;
  • Occupational Choice;
  • Financial Deepening

Correspondence:

c1 Address correspondence to: Hyeok Jeong, Department of Economics, University of Southern California, 3620 S. Vermont Ave., Kaprielian Hall Room 300, Los Angeles, CA 90089, USA; e-mail: hjeong@usc.edu.

Footnotes

We thank Natalia Ramondo, Alex Karaivanov, and David Cuberes for research assistance. We also appreciate the helpful comments from Lars Hansen, Hugo Hopenhayn, Roger Moon, and the participants of the conference in Buenos Aires honoring Rolf Mantel, European Meeting of Econometric Society in Venice, and the Money and Banking workshop and Applications of Economics workshop at the University of Chicago. Financial support from NSF (SES-0318340) and NICHD (R01 HD27638) is gratefully acknowledged.

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