Working Paper: CEPR ID: DP18344
Authors: Florin Bilbiie; Giorgio Primiceri; Andrea Tambalotti
Abstract: We quantify the connection between inequality and business cycles in a medium-scale New Keynesian model with tractable household heterogeneity, estimated with aggregate and cross-sectional data. We find that inequality substantially amplifies cyclical fluctuations. The primary source of this amplification is cyclical precautionary saving behavior. Savers reduce their consumption to insure themselves against the idiosyncratic risk of large income drops, which rises in recessions.
Keywords: inequality; business cycles; New Keynesian model; household heterogeneity
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inequality (D63) | cyclical fluctuations (E32) |
| cyclical precautionary saving behavior (E21) | cyclical fluctuations (E32) |
| S agents (L85) | precautionary saving behavior (D14) |
| precautionary saving behavior (D14) | consumption (E21) |
| risk of income drops (E25) | precautionary saving behavior (D14) |
| inequality (D63) | risk of income drops (E25) |
| elimination of inequality features (J70) | reduced volatility in business cycles (E32) |