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Inequality and Aggregate Demand

Author

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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.

Suggested Citation

  • 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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    Cited by:

    1. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, Elsevier.
    2. Andreas Fagereng & Martin B. Holm & Gisle J. Natvik, 2016. "MPC heterogeneity and household balance sheets," Discussion Papers 852, Statistics Norway, Research Department.
    3. Jordi Galí, 2018. "The State of New Keynesian Economics: A Partial Assessment," NBER Working Papers 24845, National Bureau of Economic Research, Inc.
    4. repec:bin:bpeajo:v:48:y:2017:i:2017-01:p:235-316 is not listed on IDEAS
    5. Keshav Dogra & Sushant Acharya, 2017. "The Side Effects of Safe Asset Creation," 2017 Meeting Papers 1453, Society for Economic Dynamics.
    6. M. Marx & B. Mojon & F. Velde, 2017. "Why Have Interest Rates Fallen far Below the Return on Capital," Working papers 630, Banque de France.
    7. 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.
    8. Atanas Pekanov, 2018. "The New View on Fiscal Policy and its Implications for the European Monetary Union," WIFO Working Papers 562, WIFO.
    9. repec:aea:jecper:v:32:y:2018:i:3:p:87-112 is not listed on IDEAS
    10. Balamatsias, Pavlos, 2018. "Democracy and government spending," MPRA Paper 84975, University Library of Munich, Germany.
    11. Pierre Monnin, 2017. "Monetary Policy, Macroprudential Regulation and Inequality," Discussion Notes 1702, Council on Economic Policies.
    12. repec:eee:chieco:v:46:y:2017:i:c:p:208-228 is not listed on IDEAS
    13. Galí, Jordi, 2018. "The State of New Keynesian Economics: A Partial Assessment," CEPR Discussion Papers 13095, C.E.P.R. Discussion Papers.

    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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