Gonzalo Paz-Pardo

Working papers

The aggregate and distributional implications of credit shocks on housing and rental markets (joint with Andrew Hannon and Juan Castellanos)

ECB Working Paper Series

Media coverage: Irish Independent  The Economist  Irish Examiner

We build a model of the aggregate housing and rental markets in which house prices and rents are determined endogenously. Households can choose their housing tenure status (renters, homeowners, or landlords) and the size of their homes depending on their age, income and wealth. We use our model to study the impact of changes in credit conditions on house prices, rents and household welfare. We analyse the introduction of policies that limited loan-to-value (LTV) and loan-to-income (LTI) ratios of newly originated mortgages in Ireland in 2015 and find that, consistent with empirical evidence, they mitigate house price growth but increase rents. Homeownership rates drop, and young and middle-income households are negatively affected by the reform. An unexpected permanent rise in real interest rates has similar effects – by making mortgages more expensive and alternative investments more attractive for landlords, it increases rents relative to house prices.

The life-cycle dynamics of wealth mobility (joint with Richard Audoly, Rory McGee and Sergio Ocampo Díaz)

ECB Working Paper Series   NYFed Staff Reports   IFS Working Paper Series

We use 25 years of tax records for the Norwegian population to study the mobility of wealth over people's lifetimes. We find considerable wealth mobility over the life cycle. To understand the underlying mobility patterns, we group individuals with similar wealth rank histories using agglomerative hierarchical clustering, a tool from statistical learning.  The mobility patterns we elicit provide evidence of segmented mobility. Over 60 percent of the population remains at the top or bottom of the wealth distribution throughout their lives. Mobility is driven by the remaining 40 percent, who move only within the middle of the distribution. Movements are tied to differential income trajectories and business activities across groups. We show parental wealth is the key predictor of who is persistently rich or poor, while human capital is the main predictor of those who rise and fall through the middle of the distribution. 

Richer Earnings Dynamics, Consumption and Portfolio Choice over the Life-Cycle (joint with Julio Gálvez, new version January 2025) - R&R at the Journal of Financial Economics

Bank of Spain Working Paper Series    ECB Working Paper Series

Households face earnings risk which is non-normal and varies by age and over the income distribution. We show that allowing for the rich features of earnings dynamics that are present in the data, in the context of a structurally estimated life- cycle portfolio choice model, helps to better understand the limited participation of households in the stock market, the age profile of participation, and their low holdings of risky assets. Households are subject to more background risk than previously considered; as a result, the estimated model under the flexible earnings process implies a substantially lower coefficient of risk aversion.

Published papers

Wage Risk and Government and Spousal Insurance (joint with Mariacristina De Nardi and Giulio Fella) - Review of Economic Studies (2025)

Published version  VoxEU column  IFS Working Paper

The extent to which households can self-insure depends on their wage risk and family structure. We study the UK and show that the persistence and riskiness of wages depends on one’s age and position in the wage distribution. We calibrate a model of couples and singles with two alternative wage processes: a canonical one and a flexible one that better matches the data. We use our model to evaluate the optimal mix of two types of benefits—in-work versus income floor— under the two wage processes. Allowing for rich wage dynamics is important to properly evaluate benefit reforms: the canonical process underestimates wage persistence for women and implies that at the optimum, in-work benefits should account for most benefit income. The richer wage process, instead implies that the income floor should be the major source of benefits, similar to the system in place in the UK.

Who bears the costs of inflation? Euro area households and the 2021-23 shock (joint with Filippo Pallotti, Jirka Slacalek, Oreste Tristani and Gianluca Violante)  - Journal of Monetary Economics (2024)

  Published version   ECB Working Paper Series   VoxEU column   ECB Research Bulletin (with video)

Media coverage: Bloomberg   FAZ

We measure the heterogeneous welfare effects of the recent inflation surge across households in the euro area. A simple framework illustrating the numerous transmission channels of surprise inflation to household welfare guides our empirical exercise. By combining micro data and aggregate time series, we conclude that: (i) country-level average welfare costs –expressed as a share of triennial income– were sizable and heterogeneous: around 3% in France and Spain, almost 7% in Germany, and almost 8% in Italy; (ii) this inflation episode resembles an age-dependent tax, with the retirees losing up to 13%, and roughly 40% of the 25–44 year-old winning; (iii) losses were quite uniform across consumption quantiles because rigid rents served as a hedge for the poor; (iv) nominal net positions were the key driver of heterogeneity across-households; (v) the rise in energy prices generated vast variation in individual-level inflation rates, but unconventional fiscal policies helped shield households. The counterpart of this household-sector loss is a significant gain for the government.

Homeownership and Portfolio Choice over the Generations, American Economic Journal: Macroeconomics (2024)

Published version    Appendix   Replication package

        VoxEU column   ECB Research Bulletin    SUERF Policy Brief

Earnings are riskier and more unequal for households born in the 1960s and 1980s than for those born in the 1940s. Despite improvements in financial conditions, younger generations are less likely to be living in their own homes than older generations at the same age. By using a life-cycle model with housing and portfolio choice that includes flexible earnings risk and aggregate asset price risk, I show that changes in earnings dynamics account for a large part of the reduction in homeownership across generations. Lower-income households find it harder to buy housing, and as a result accumulate less wealth.

Family and Government Insurance: Wage, Earnings, and Income Risks in the Netherlands and the U.S. (joint with Mariacristina De Nardi, Giulio Fella, Marike Knoef, and Raun van Ooijen),  Journal of Public Economics (2021).

Published version   VoxEU column

We document new facts about risk in male wages and earnings, household earnings, and pre- and post-tax income in the Netherlands and the United States. We find that, in both countries, earnings display important deviations from the typical assumptions of linearity and normality. Individual-level male wage and earnings risk is relatively high at the beginning and end of the working life, and for those in the lower and upper parts of the income distribution. Hours are the main driver of the negative skewness and, to a lesser extent, the high kurtosis of earnings changes. Even though we find no evidence of added-worker effects, the presence of spousal earnings reduces the variability of household income compared to that of male earnings. In the Netherlands, government transfers are a major source of insurance, substantially reducing the standard deviation, negative skewness, and kurtosis of income changes. In the U.S. the role of family insurance is much larger than in the Netherlands. Family and government insurance reduce, but do not eliminate nonlinearities in household disposable income by age and previous earnings in either country.

“Nonlinear household earnings dynamics, self-insurance, and welfare" (joint with Mariacristina De Nardi and Giulio Fella),  Journal of the European Economic Association (2020). 

  Published version   Earnings processes and Markov chains for use in structural models  Replication materials

An earlier, different version of the paper was circulated as “The Implications of Richer Earnings Dynamics for Consumption and Wealth", NBER working paper no. 21917 (2016).

Earnings dynamics are much richer than typically assumed in macro models with heterogeneous agents. This holds for individual-pre-tax and household-post-tax earnings and across administrative (Social Security Administration) and survey (Panel Study of Income Dynamics) data. We estimate two alternative processes for household after-tax earnings and study their implications using a standard life-cycle model. Both processes feature a persistent and a transitory component, but while the first one is the canonical linear process with stationary shocks, the second one has substantially richer earnings dynamics, allowing for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age. Allowing for richer earnings dynamics implies a substantially better fit of the evolution of cross-sectional consumption inequality over the life cycle and of the individual-level degree of consumption insurance against persistent earnings shocks. The richer earnings process also implies lower welfare costs of earnings risk.

Work in progress

Women and men's labor income risk over the business cycle (joint with Mariacristina De Nardi, Giulio Fella, Marike Knoef, and Raun van Ooijen)

Measuring labor income dynamics using expectations (joint with Manuel Arellano, Orazio Attanasio, Margherita Borella and Mariacristina De Nardi): slides (very preliminary)