Income and Wealth Heterogeneity in the Macroeconomy

Posted: 30 Dec 1998

See all articles by Per Krusell

Per Krusell

Princeton University - Department of Economics; Stockholm University - Institute for International Economic Studies (IIES); Centre for Economic Policy Research (CEPR)

Anthony A. Smith

Yale University - Cowles Foundation

Abstract

How do movements in the distribution of income and wealth affect the macroeconomy? We analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity. Our main finding is that, in the stationary stochastic equilibrium, the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution. This result is robust to substantial changes in both parameter values and model specification. Our benchmark model, whose only difference from the representative-agent framework is the existence of uninsurable idiosyncratic risk, displays far less cross-sectional dispersion and skewness in wealth than U.S. data. However, an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data. Furthermore, this extension features aggregate time series that depart significantly from permanent income behavior.

JEL Classification: E25

Suggested Citation

Krusell, Per L. and Smith, Anthony A., Income and Wealth Heterogeneity in the Macroeconomy. Available at SSRN: https://ssrn.com/abstract=128913

Per L. Krusell

Princeton University - Department of Economics ( email )

111 Fisher Hall
Princeton, NJ
United States
609-258-4003 (Phone)
609-258-6419 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden
+46 0 8 16 30 73 (Phone)
+46 0 8 16 41 77 (Fax)

HOME PAGE: http://rincewind.iies.su.se/%7Ekrusell/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Anthony A. Smith (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

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