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The Wealth Distribution With Durable Goods

  • Antonia Díaz
  • Maria Jose Luengo-Prado

    ()

This paper studies the effect that illiquid assets and collateral credit frictions have on the level of wealth inequality in a standard model of ex-ante heterogenous agents with idiosyncratic uncertainty. We calibrate our model so that its steady state statistics match selected aggregate statistics of the U.S. economy and data on the earnings distribution. We find that adding illiquid assets and collateral credit frictions decreases wealth inequality decreases slightly relative to an economy with liquid assets and no credit frictions. The effect is small because these frictions mostly affect poor households that account for a small fraction of aggregate wealth. Nevertheless, our richer model allows us to study other dimensions of wealth inequality. In particular, our model replicates the fact that financial assets are more concentrated than total wealth, while residential assets are less concentrated. Furthermore, we document that, in the U.S., the earnings and housing distributions are remarkably similar. Our model can account for this fact so long as the earnings process is fairly persistent

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Paper provided by Universidad Carlos III, Departamento de Economía in its series Economics Working Papers with number we067027.

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Date of creation: Dec 2006
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Handle: RePEc:cte:werepe:we067027
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  1. Joseph Gruber & Robert Martin, 2003. "Precautionary savings and the wealth distribution with illiquid durables," International Finance Discussion Papers 773, Board of Governors of the Federal Reserve System (U.S.).
  2. Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
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  4. Vincenzo Quadrini, 1997. "Entrepreneurship, saving and social mobility," Discussion Paper / Institute for Empirical Macroeconomics 116, Federal Reserve Bank of Minneapolis.
  5. Jose Luengo-Prado, Maria, 2006. "Durables, nondurables, down payments and consumption excesses," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1509-1539, October.
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  14. Per Krusell & Anthony A. Smith, Jr., . "Income and Wealth Heterogeneity in the Macroeconomy," GSIA Working Papers 1997-37, Carnegie Mellon University, Tepper School of Business.
  15. Gervais, Martin, 2002. "Housing taxation and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1461-1489, October.
  16. Chen, Chau-Nan & Tsaur, Tien-Wang & Rhai, Tong-Shieng, 1982. "The Gini Coefficient and Negative Income," Oxford Economic Papers, Oxford University Press, vol. 34(3), pages 473-78, November.
  17. Vincenzo Quadrini & José-Víctor Ríos-Rull, 1997. "Understanding the U.S. distribution of wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 22-36.
  18. Ana Castaneda & Javier Diaz-Gimenez & Jose-Victor Rios-Rull, 2003. "Accounting for the U.S. Earnings and Wealth Inequality," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 818-857, August.
  19. Hopenhayn, Hugo A & Prescott, Edward C, 1992. "Stochastic Monotonicity and Stationary Distributions for Dynamic Economies," Econometrica, Econometric Society, vol. 60(6), pages 1387-406, November.
  20. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
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