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Shocks, Frictions, and Inequality in US Business Cycles

Author

Listed:
  • Christian Bayer

    (University of Bonn)

  • Benjamin Born

    (Frankfurt School of Business and Management
    CEPR
    CESifo)

  • Ralph Luetticke

    (CEPR
    University College London
    Centre for Macroeconomics (CFM))

Abstract
How much does inequality matter for the business cycle and vice versa? Using a Bayesian likelihood approach, we estimate a heterogeneous-agent New-Keynesian (HANK) model with incomplete markets and portfolio choice between liquid and illiquid assets. The model enlarges the set of shocks and frictions in Smets and Wouters (2007) by allowing for shocks to income risk and taxes. We nd that adding data on inequality does not materially change the estimated shocks and frictions driving the US business cycle. The estimated shocks, however, have signicantly contributed to the evolution of US wealth and income inequality. The systematic components of monetary and scal policy are important for inequality as well.

Suggested Citation

  • Christian Bayer & Benjamin Born & Ralph Luetticke, 2020. "Shocks, Frictions, and Inequality in US Business Cycles," Discussion Papers 2003, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2003
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    3. Laura Liu & Mikkel Plagborg-M{o}ller, 2021. "Full-Information Estimation of Heterogeneous Agent Models Using Macro and Micro Data," Papers 2101.04771, arXiv.org, revised Jun 2022.
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    6. Christian Bayer & Ralph Luetticke & Maximilian Weiss & Yannik Winkelmann, 2024. "An Endogenous Gridpoint Method for Distributional Dynamics," ECONtribute Discussion Papers Series 311, University of Bonn and University of Cologne, Germany.
    7. Adrien Auclert & Bence Bardóczy & Matthew Rognlie & Ludwig Straub, 2021. "Using the Sequence‐Space Jacobian to Solve and Estimate Heterogeneous‐Agent Models," Econometrica, Econometric Society, vol. 89(5), pages 2375-2408, September.
    8. Charalampidis, Nikolaos, 2022. "Top income shares, inequality, and business cycles: United States, 1957–2016," European Economic Review, Elsevier, vol. 150(C).
    9. Cantore, Cristiano & Freund, Lukas B., 2021. "Workers, capitalists, and the government: fiscal policy and income (re)distribution," Journal of Monetary Economics, Elsevier, vol. 119(C), pages 58-74.
    10. Böhl, Gregor & Strobel, Felix, 2020. "US business cycle dynamics at the zero lower bound," IMFS Working Paper Series 143, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    11. Gatt, William, 2024. "Wealth inequality and the distributional effects of maximum loan-to-value ratio policy," Journal of Economic Dynamics and Control, Elsevier, vol. 164(C).
    12. Alice Albonico & Guido Ascari & Qazi Haque, 2024. "The (Ir)Relevance of Rule‐of‐Thumb Consumers for U.S. Business Cycle Fluctuations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(4), pages 769-804, June.
    13. Aursland, Thor Andreas & Steen, Frode, 2021. "Unemployment shocks, cyclical prices and shopping behavior," Discussion Paper Series in Economics 3/2021, Norwegian School of Economics, Department of Economics.
    14. Juan Carlos Parra‐Alvarez & Olaf Posch & Mu‐Chun Wang, 2023. "Estimation of Heterogeneous Agent Models: A Likelihood Approach," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 85(2), pages 304-330, April.
    15. Böhl, Gregor, 2022. "Ensemble MCMC sampling for robust Bayesian inference," IMFS Working Paper Series 177, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    16. Boehl, Gregor, 2022. "Efficient solution and computation of models with occasionally binding constraints," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    17. François Courtoy, 2022. "When Household Heterogeneity Matters Optimal Fiscal Policy in a Medium-Scale TANK Model," LIDAM Discussion Papers IRES 2022009, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    18. Kase, Hanno & Melosi, Leonardo & Rottner, Matthias, 2024. "Estimating Nonlinear Heterogeneous Agent Models with Neural Networks," The Warwick Economics Research Paper Series (TWERPS) 1499, University of Warwick, Department of Economics.
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    More about this item

    Keywords

    Bayseian estimation; Business cycles; Income inequality; Incomplete markets; Monetary and fiscal policy; Wealth inequality;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy

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