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posted on 06 February 2018

Inequality And Recessions

from the Chicago Fed

-- this post authored by by Gene Amromin, Mariacristina De Nardi, and Karl Schulze

The increase in inequality over the past several decades has received widespread attention from both academics and the public at large. While much of this discourse centers on either the causes or normative implications of increasing inequality, it is important to ask whether the widening gap between the rich and poor has any direct effects on macroeconomic aggregates and, in particular, on the severity of the Great Recession, when output and consumption dropped precipitously and were slow to recover.

Is it possible that the changing distribution of wealth intensified and lengthened the effects of this downturn? More broadly, should economists and policymakers concerned with macroeconomics be worried about wealth inequality?

In this article, we first summarize two key papers - one by Krusell and Smith (KS),2 and the other by Krueger, Mitman, and Perri (KMP).3 The major lesson from their work is that economies with a large fraction of low-wealth households, who are borrowing constrained and have a high marginal propensity to consume (MPC), can experience a larger consumption drop in response to a macroeconomic shock than economies where wealth is more evenly distributed and fewer households are borrowing constrained. Next, we turn to the Panel Study of Income Dynamics (PSID) and Credit Bureau Panel Data (Equifax) to examine the interaction between consumption and wealth during the Great Recession, highlighting several dimensions of the data that are likely to tighten the relationship between wealth inequality and the intensity of a downturn. Our recent working paper4 argues that the role of borrowing constraints cannot be adequately captured by only having a large share of households with little wealth before a recession, as is currently the case in most macroeconomic theory (Kaplan and Violante5 are a notable exception).

[click on image below to continue reading]

Source

http://app.frbcommunications.org/e/er?s=1064&lid=5090 &elqTrackId=70db562bf3e343d4b0091cae300df463 &elq=a379eff769a34f2f943e52c013063c0b &elqaid=12717&elqat=1

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