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Income inequality and the depth of economic downturns

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  • Emanuel Kohlscheen
  • Marco Jacopo Lombardi
  • Egon Zakrajšek

Abstract

Using an international panel data set, we analyze the implications of rising income inequality for aggregate consumption. We document that greater concentration of (after-tax) income in the top decile is associated with a significantly larger and more persistent contraction in consumption in the aftermath of economic downturns. These findings are consistent with lower propensities to consume among wealthier households and imply that disparities in income flows at turning points of the business cycle can significantly influence macroeconomic outcomes.

Suggested Citation

  • Emanuel Kohlscheen & Marco Jacopo Lombardi & Egon Zakrajšek, 2021. "Income inequality and the depth of economic downturns," BIS Working Papers 943, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:943
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    Cited by:

    1. Petar Soric & Oscar Claveira, 2023. ""Income inequality and redistribution in Scandinavian countries"," IREA Working Papers 202310, University of Barcelona, Research Institute of Applied Economics, revised Oct 2023.
    2. Sebastian Doerr & Thomas Drechsel & Donggyu Lee, 2021. "Income inequality, financial intermediation, and small firms," BIS Working Papers 944, Bank for International Settlements.
    3. Matusche, Alexander & Wacks, Johannes, 2023. "Does wealth inequality affect the transmission of monetary policy?," Journal of Macroeconomics, Elsevier, vol. 75(C).

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    More about this item

    Keywords

    consumption; income inequality; recessions; financial crises; cross-country evidence;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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