Macroeconomics and Household Heterogeneity

87 Pages Posted: 13 Jun 2016

See all articles by Dirk Krueger

Dirk Krueger

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Kurt Mitman

IIES

Fabrizio Perri

Bocconi University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: June 2016

Abstract

The goal of this chapter is to study how, and by how much, household income, wealth, and preference heterogeneity amplify and propagate a macroeconomic shock. We focus on the U.S. Great Recession of 2007-2009 and proceed in two steps. First, using data from the Panel Study of Income Dynamics, we document the patterns of household income, consumption and wealth inequality before and during the Great Recession. We then investigate how households in different segments of the wealth distribution were affected by income declines, and how they changed their expenditures differentially during the aggregate downturn. Motivated by this evidence, we study several variants of a standard heterogeneous household model with aggregate shocks and an endogenous cross-sectional wealth distribution. Our key finding is that wealth inequality can significantly amplify the impact of an aggregate shock, and it does so if the distribution features a sufficiently large fraction of households with very little net worth that sharply increase their saving (i.e. they are not hand-to mouth) as the recession hits. We document that both these features are observed in the PSID. We also investigate the role that social insurance policies, such as unemployment insurance, play in shaping the cross-sectional income and wealth distribution, and through it, the dynamics of business cycles.

Suggested Citation

Krueger, Dirk and Mitman, Kurt and Perri, Fabrizio, Macroeconomics and Household Heterogeneity (June 2016). NBER Working Paper No. w22319. Available at SSRN: https://ssrn.com/abstract=2794725

Dirk Krueger (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6691 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~dkrueger/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Kurt Mitman

IIES ( email )

Stockholm, SE-10691
Sweden

HOME PAGE: http://kurtmitman.com

Fabrizio Perri

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

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