Shocks Frictions and Inequality in US Business Cycles

In today's Macro seminar Ralph Luetticke from University College London, discusses his paper on Shocks, Frictions and Inequality in US Business Cycles

Ralph Luetticke, from the Department of Economics at University College London will be presenting his paper (written with Christian Bayer and Benjamin Born) on Shocks, Frictions and Inequality in US Business Cycles.

Abstract:

In how far 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&Wouters (2007) by allowing for shocks to income risk and portfolio liquidity. We find income risk to be an important driver of output and consumption. This makes US recessions more demand driven relative to the otherwise identical complete markets benchmark (RANK). The HANK model further implies that business cycle shocks and policy responses have significantly contributed to the evolution of US wealth and income inequality.