Macroeconomics and Household Heterogeneity

Dirk Krueger, Kurt Mitman and Fabrizio Perri

Chapter Chapter 11 in Handbook of Macroeconomics, 2016, vol. 2, pp 843-921 from Elsevier

Abstract: The goal of this chapter is to study how, and by how much, household income, wealth, and preference heterogeneity amplify and propagate a macroeconomic shock. We focus on the US Great Recession of 2007–09 and proceed in two steps. First, using data from the Panel Study of Income Dynamics, we document the patterns of household income, consumption, and wealth inequality before and during the Great Recession. We then investigate how households in different segments of the wealth distribution were affected by income declines, and how they changed their expenditures differentially during the aggregate downturn. Motivated by this evidence, we study several variants of a standard heterogeneous household model with aggregate shocks and an endogenous cross-sectional wealth distribution. Our key finding is that wealth inequality can significantly amplify the impact of an aggregate shock, and it does so if the distribution features a sufficiently large fraction of households with very little net worth that sharply increase their saving (ie, they are not hand-to mouth) as the recession hits. We document that both these features are observed in the PSID. We also investigate the role that social insurance policies, such as unemployment insurance, play in shaping the cross-sectional income and wealth distribution, and through it, the dynamics of business cycles.

Keywords: Recessions; Wealth inequality; Social insurance; E21; E32; J65 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (205)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1574004816300039
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Macroeconomics and Household Heterogeneity (2016)
Working Paper: Macroeconomics and Household Heterogeneity (2016)
Working Paper: Macroeconomics and Household Heterogeneity (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:macchp:v2-843

DOI: 10.1016/bs.hesmac.2016.04.003

Access Statistics for this chapter

More chapters in Handbook of Macroeconomics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().