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Inequality, Risk, and Business Cycles

Author

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  • Florin O. Bilbiie
  • Giorgio Primiceri
  • Andrea Tambalotti

Abstract

We quantify the connection between inequality, risk, and business cycles in a medium-scale New Keynesian model with tractable household heterogeneity, estimated with aggregate and cross-sectional data. We find that inequality and risk substantially amplify cyclical fluctuations. Most of this amplification operates through cyclical precautionary saving induced by countercyclical idiosyncratic risk. Savers reduce their consumption to insure themselves against large income drops, whose likelihood rises in recessions. Independent evidence supports both the magnitude and broad incidence of this recessionary increase in risk across skill and income groups, and indicates that the sizable, countercyclical premium on illiquid claims generated by the same mechanism is quantitatively plausible.

Suggested Citation

  • Florin O. Bilbiie & Giorgio Primiceri & Andrea Tambalotti, 2023. "Inequality, Risk, and Business Cycles," NBER Working Papers 31729, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:31729
    Note: EFG ME
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    Cited by:

    1. Fabrice Collard & Patrick Fève & Philipp Wangner, 2026. "The Power of Persistence How Demand Shocks and Monetary Policy Shape Macroeconomic Outcomes," CRC TR 224 Discussion Paper Series crctr224_2025_785, University of Bonn and University of Mannheim, Germany.
    2. Brendan Brundage & Dan McGee & Daniele Tavani, 2026. "Theoretical Approaches in Stratification Economics," NBER Chapters, in: The Economics of Race and Stratification, National Bureau of Economic Research, Inc.
    3. Bonciani, Dario & Oh, Joonseok, 2026. "Unemployment risk, liquidity traps, and monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 182(C).
    4. Cantore, Cristiano & Leonardi, Edoardo, 2025. "Monetary–fiscal interaction and the liquidity of government debt," European Economic Review, Elsevier, vol. 173(C).
    5. repec:bon:boncrc:crctr224_2025_624 is not listed on IDEAS
    6. Xu, Zhiwei & Xue, Jianpo & Zhang, Zhewei, 2025. "Understanding the distributional effects of income uncertainty shocks," China Economic Review, Elsevier, vol. 91(C).
    7. Zheng Gong, 2025. "When Does Household Heterogeneity Matter for Aggregate Fluctuations?," CRC TR 224 Discussion Paper Series crctr224_2025_624v2, University of Bonn and University of Mannheim, Germany, revised Sep 2025.

    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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