Working Paper: CEPR ID: DP14364
Authors: Christian Bayer; Benjamin Born; Ralph Luetticke
Abstract: We show how a heterogeneous-agent New-Keynesian (HANK) model with incom- plete markets and portfolio choice can be estimated in state space using a Bayesian approach. To render estimation feasible, the structure of the economy can be exploited and the dimensionality of the model automatically reduced based on the Bayesian priors. We apply this approach to analyze how much inequality matters for the business cycle and vice versa. Even when the model is estimated on aggregate data alone and with a set of shocks and frictions designed to match aggregate data, it broadly reproduces observed US inequality dynamics.
Keywords: Incomplete Markets; Business Cycles; Monetary and Fiscal Policy; Bayesian Estimation; Wealth Inequality; Income Inequality
JEL Codes: E32; E63; C11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Incomplete markets (D52) | Consumption dynamics (E21) |
| Technology shocks (O33) | Consumption growth (E20) |
| Markup shocks (Y60) | Consumption growth (E20) |
| Business cycle shocks (E32) | Wealth and income inequality (D31) |
| Income risk (G52) | Wealth inequality (D31) |
| Tax progressivity (H29) | Wealth inequality (D31) |
| Business cycle conditions (E32) | Inequality (D63) |
| Inequality (D63) | Business cycle conditions (E32) |