Inequality and Business Cycles

Florin Bilbiie, Giorgio Primiceri and Andrea Tambalotti

No 18344, CEPR Discussion Papers from Centre for Economic Policy Research

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.

Date: 2023-08
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Related works:
Working Paper: Inequality and Business Cycles (2023)
Working Paper: Inequality and Business Cycles (2022)
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