Working Paper: NBER ID: w24280
Authors: Adrien Auclert; Matthew Rognlie
Abstract: We explore the transmission mechanism of income inequality to output. In the short run, higher inequality reduces output because marginal propensities to consume are negatively correlated with incomes, but this effect is quantitatively small in the data and in our model. In the long run, the output effects of income inequality are small if inequality is caused by rising dispersion in individual fixed effects, but can be large if it is the manifestation of higher individual income risk. We formalize the connection between partial and general equilibrium effects, and show that the two are closely related under standard assumptions about the behavior of monetary policy. Our economy features a depressed long-run real interest rate, allowing us to quantify the potential contribution of income inequality to secular stagnation.
Keywords: Income Inequality; Aggregate Demand; Marginal Propensity to Consume; Monetary Policy; Secular Stagnation
JEL Codes: D31; D52; E21; E63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher income inequality (D31) | reduced output (E23) |
| increased individual income risk (D14) | significantly negative long-run output effects (E23) |
| shifts in income distribution (D31) | limited effect on aggregate consumption (E21) |
| inequality shock (F61) | percentage change in output (E23) |
| general equilibrium effects (D50) | partial equilibrium effects (D59) |