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Macroeconomics and Household Heterogeneity

Fabrizio Perri (), Dirk Krueger () and Kurt Mitman

No 529, Staff Report from Federal Reserve Bank of Minneapolis

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 U.S. Great Recession of 2007-2009 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 (i.e. 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 (search for similar items in EconPapers)
JEL-codes: E21 E32 J65 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
Date: 2016-06-01
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Working Paper: Macroeconomics and Household Heterogeneity (2016) Downloads
Working Paper: Macroeconomics and Household Heterogeneity (2016) Downloads
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