Working Paper: NBER ID: w31729
Authors: Florin O. 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: No keywords provided
JEL Codes: E30
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) |
| savers reduce consumption (E21) | risk of falling into lower income bracket (E25) |
| H agents have higher marginal propensity to consume (D12) | cyclical fluctuations (E32) |
| long-term level of inequality (D31) | saver behavior (D14) |
| idiosyncratic income shocks (D89) | business cycle effects (E32) |
| no-inequality benchmark (D63) | reduced business cycle fluctuations (E32) |