Income and Wealth Heterogeneity in the Macroeconomy

TLDR

The study investigates how changes in income and wealth distribution influence macroeconomic outcomes. The authors use a calibrated stochastic growth model that incorporates partially uninsurable idiosyncratic risk and aggregate productivity shocks to analyze this effect. They find that macro aggregates are largely determined by the mean wealth, a result robust to parameter changes, and that adding modest heterogeneity in thrift reproduces observed wealth dispersion while yielding aggregate dynamics that depart from permanent‑income behavior.

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.