Demand, wealth inequality and the business cycle

Lilia Cavallari, D’Addona, Stefano and Paolo Porchia

Journal of Macroeconomics, 2025, vol. 85, issue C

Abstract: We consider a flexible price continuous-time DSGE model of a closed economy populated by heterogeneous households subject to uninsurable idiosyncratic income risk and aggregate TFP shocks. The economy produces a variety of imperfectly substitutable final goods. Our main innovation is a rich representation of household consumption and saving behavior allowing for a time-varying elasticity of substitution across varieties. Specifically, we consider a utility function displaying Increasing Elasticity of Substitution (IES). We provide a convenient approach to handle the complex dynamic programming problem implied by income heterogeneity, aggregate shocks and non-homothetic preferences. We show that IES preferences help to replicate important features of the wealth distribution observed in the data together with a plausible macroeconomic dynamics.

Keywords: DSGE model; Heterogeneous agents; Wealth distribution; Consumption behavior; Saving behavior; Increasing elasticity of substitution (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:85:y:2025:i:c:s0164070425000308

DOI: 10.1016/j.jmacro.2025.103693

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