Bilbiie, F., Primiceri, G. E., Tambalotti, A.

Inequality and Business Cycles

CWPE2275

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.

Author links: Florin Bilbiie  

PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2275.pdf

Open Access Link: https://doi.org/10.17863/CAM.93371

Keynes Fund Project(s):
Inequality and Business Cycles (JHVP)  

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