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Inequality and Aggregate Demand

Adrien Auclert () and Matthew Rognlie ()

No 24280, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We explore the transmission mechanism of income inequality to output. In the short run, higher inequality reduces output because marginal propensities to consume are negatively correlated with incomes, but this effect is quantitatively small in the data and in our model. In the long run, the output effects of income inequality are small if inequality is caused by rising dispersion in individual fixed effects, but can be large if it is the manifestation of higher individual income risk. We formalize the connection between partial and general equilibrium effects, and show that the two are closely related under standard assumptions about the behavior of monetary policy. Our economy features a depressed long-run real interest rate, allowing us to quantify the potential contribution of income inequality to secular stagnation.

JEL-codes: D31 D52 E21 E63 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2018-02
Note: EFG ME
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Working Paper: Inequality and Aggregate Demand (2016) Downloads
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