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Inequality and Aggregate Demand

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  • Adrien Auclert
  • Matthew Rognlie

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.

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  • Adrien Auclert & Matthew Rognlie, 2018. "Inequality and Aggregate Demand," NBER Working Papers 24280, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24280
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    1. Inequality and Aggregate Demand
      by Christian Zimmermann in NEP-DGE blog on 2016-11-23 01:42:48

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    Cited by:

    1. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 843-921, Elsevier.
    2. Axelle Ferriere & Gaston Navarro, 2013. "The Heterogeneous Effects of Government Spending: It's All About Taxes," Working Papers 13-18, New York University, Leonard N. Stern School of Business, Department of Economics.
    3. Pablo Cuba-Borda & Sanjay R. Singh, 2019. "Understanding Persistent Stagnation," International Finance Discussion Papers 1243, Board of Governors of the Federal Reserve System (U.S.).
    4. Andreas Fagereng & Martin B. Holm & Gisle J. Natvik, 2016. "MPC heterogeneity and household balance sheets," Discussion Papers 852, Statistics Norway, Research Department.
    5. Jonathan Heathcote & Fabrizio Perri, 2018. "Wealth and Volatility," Review of Economic Studies, Oxford University Press, vol. 85(4), pages 2173-2213.
    6. Atif R. Mian & Ludwig Straub & Amir Sufi, 2020. "Indebted Demand," NBER Working Papers 26940, National Bureau of Economic Research, Inc.
    7. Jordi Galí, 2018. "The State of New Keynesian Economics: A Partial Assessment," Journal of Economic Perspectives, American Economic Association, vol. 32(3), pages 87-112, Summer.
    8. Jesus Fernandez-Villaverde & Samuel Hurtado & Galo Nuno, 2019. "Financial Frictions and the Wealth Distribution," PIER Working Paper Archive 19-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    9. Marco Del Negro & Domenico Giannone & Marc P. Giannoni & Andrea Tambalotti, 2017. "Safety, Liquidity, and the Natural Rate of Interest," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 48(1 (Spring), pages 235-316.
    10. Keshav Dogra & Sushant Acharya, 2017. "The Side Effects of Safe Asset Creation," 2017 Meeting Papers 1453, Society for Economic Dynamics.
    11. Boppart, Timo & Krusell, Per & Mitman, Kurt, 2018. "Exploiting MIT shocks in heterogeneous-agent economies: the impulse response as a numerical derivative," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 68-92.
    12. M. Marx & B. Mojon & F. Velde, 2017. "Why Have Interest Rates Fallen far Below the Return on Capital," Working papers 630, Banque de France.
    13. Slacalek, Jiri & Tristani, Oreste & Violante, Giovanni L., 2020. "Household balance sheet channels of monetary policy: A back of the envelope calculation for the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 115(C).
    14. Atanas Pekanov, 2018. "The New View on Fiscal Policy and its Implications for the European Monetary Union," WIFO Working Papers 562, WIFO.
    15. Edouard Challe, 2017. "Uninsured Unemployment Risk and Optimal Monetary Policy," Working Papers 2017-54, Center for Research in Economics and Statistics.
    16. Bilbiie, Florin Ovidiu & Känzig, Diego R & Surico, Paolo, 2019. "Capital, Income Inequality, and Consumption: the Missing Link," CEPR Discussion Papers 14118, C.E.P.R. Discussion Papers.
    17. Yves Achdou & Jiequn Han & Jean-Michel Lasry & Pierre-Louis Lions & Benjamin Moll, 2017. "Income and Wealth Distribution in Macroeconomics: A Continuous-Time Approach," NBER Working Papers 23732, National Bureau of Economic Research, Inc.
    18. Balamatsias, Pavlos, 2018. "Democracy and government spending," MPRA Paper 84975, University Library of Munich, Germany.
    19. Pierre Monnin, 2017. "Monetary Policy, Macroprudential Regulation and Inequality," Discussion Notes 1702, Council on Economic Policies.
    20. Glick, Reuven, 2020. "r* and the global economy," Journal of International Money and Finance, Elsevier, vol. 102(C).
    21. Zhao, Da & Wu, Tianhao & He, Qiwei, 2017. "Consumption inequality and its evolution in urban China," China Economic Review, Elsevier, vol. 46(C), pages 208-228.
    22. Bilbiie, Florin O., 2020. "The New Keynesian cross," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 90-108.

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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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