Macroeconomics and Household Heterogeneity

Krueger, Dirk; Mitman, Kurt; Perri, Fabrizio

doi:10.1016/bs.hesmac.2016.04.003

Cited by 202 publications

(191 citation statements)

References 136 publications

(212 reference statements)

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“…Krueger et al (2016) assess how wealth, income and preference heterogeneity across households amplifies aggregate shocks. Krueger et al (2016) conclude that, in an economy with the wealth distribution consistent with the data, the drop in aggregate consumption in response to a negative aggregate shock is 0.5 percentage points larger than in a representative household model. This is conditional on the economy featuring a sufficiently large share of agents with low wealth.…”

Section: Related Literaturementioning

confidence: 99%

Fiscal Consolidation Programs and Income Inequality

Brinca¹,

Ferreira²,

Franco

et al. 2017

SSRN Journal

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Following the Great Recession, many European countries implemented fiscal consolidation policies aimed at reducing government debt. Using three independent data sources and three different empirical approaches, we document a strong positive relationship between higher income inequality and stronger recessive impacts of fiscal consolidation programs across time and place. To explain this finding, we develop a life-cycle, overlapping generations economy with uninsurable labour market risk. We calibrate our model to match key characteristics of a number of European economies, including the distribution of wages and wealth, social security, taxes and debt, and study the effects of fiscal consolidation programs. We find that higher income risk induces precautionary savings behaviour, which decreases the proportion of credit-constrained agents in the economy. Credit-constrained agents have less elastic labour supply responses to fiscal consolidation achieved through either tax hikes or public spending cuts, and this explains the relationship between income inequality and the impact of fiscal consolidation programs. Our model produces a cross-country correlation between inequality and the fiscal consolidation multipliers, which is quite similar to that in the data.

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Section: Related Literaturementioning

confidence: 99%

Fiscal Consolidation Programs and Income Inequality

Brinca¹,

Ferreira²,

Franco

et al. 2017

SSRN Journal

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show abstract

“…Note, however, that unemployment spells are expected to be short (certainly relative to the length of the recession) and thus the idiosyncratic component contributes at most half (for impatient households with little income and assets) of the total welfare losses. 31 Now that we have characterized how the welfare losses are distributed across individual states, we can use the distribution of households across these states at the start of 31 In our set-up, households do not suffer from persistent earnings losses upon re-employment. Introducing this empirically plausible feature (see, for example, Davis and Von Wachter, 2011) into the model would magnify the idiosyncratic -but also the aggregate -component of the welfare losses.…”

Section: Benchmark Resultsmentioning

confidence: 99%

“…Recent research indicates that these distortions could potentially be large. 36 Krueger, Mitman, and Perri (2016) shows that in an economy in which aggregate output is partially determined because aggregate TFP depends on aggregate consumption, social insurance in general, and unemployment insurance specifically, stabilizes 35 Note that especially in the economy with surprise UI cuts, the line g ee,Z h Z l (y, a, β) is U-shaped in household wealth (and exceeds the idiosyncratic component for wealthy households). These households derive most of their income from capital income, and the returns to capital fall in the recession because of the fall in TFP.…”

Section: Ui Shockmentioning

confidence: 99%

“…6 Krueger and Perri (2004) use a similar approach to the one adopted here to quantify the welfare losses from the observed increase in earnings inequality in the last 25 years. 7 In the interest of space, the details of the calibration are in Krueger, Mitman and Perri (2016). That paper shares the broad theme (the interaction between the dynamics of macroeconomic variables and household heterogeneity in earnings, income, consumption and wealth), but focuses on the impact of micro heterogeneity for the dynamics of aggregate consumption, investment and output in the Great Recession, rather than studying the normative question of the distribution of welfare losses from the Great Recession.…”

Section: The Wealth Income and Consumption Distribution Prior To Thementioning

confidence: 99%

“…As a laboratory for our analysis, we use an augmented version of the canonical Krusell-Smith (1998) real business cycle model with household income and wealth heterogeneity, as presented in Krueger, Mitman and Perri (2016). The model features business cycles driven by productivity shocks in an economy populated by agents that face different types of idiosyncratic income shocks and accumulate wealth in order to finance consumption during retirement and to self-insure against idiosyncratic income risk.…”

Section: Introductionmentioning

confidence: 99%

See 2 more Smart Citations

On the Distribution of the Welfare Losses of Large Recessions

Krueger¹,

Mitman²,

Perri³

2016

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How big are the welfare losses from severe economic downturns, such as the U.S. Great Recession?How are those losses distributed across the population? In this paper we answer these questions using a canonical business cycle model featuring household income and wealth heterogeneity that matches micro data from the Panel Study of Income Dynamics (PSID). We document how these losses are distributed across households and how they are affected by social insurance policies. We find that the welfare cost of losing one's job in a severe recession ranges from 2% of lifetime consumption for the wealthiest households to 5% for low-wealth households. The cost increases to approximately 8%for low-wealth households if unemployment insurance benefits are cut from 50% to 10%. The fact that welfare losses fall with wealth, and that in our model (as in the data) a large fraction of households has very low wealth, implies that the impact of a severe recession, once aggregated across all households, is very significant (2.2% of lifetime consumption). We finally show that a more generous unemployment insurance system unequivocally helps low-wealth job losers, but hurts households that keep their job, even in a version of the model in which output is partly demand determined, and therefore unemployment insurance stabilizes aggregate demand and output.

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Ten Years After: Iceland’s Unfinished Business

Gylfason

2019

The 2008 Global Financial Crisis in Retrospect

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This study discusses the economic, political, and judicial aftermath of Iceland´s financial collapse in 2008. It considers lessons learned, or not learned, with emphasis on unsettled issues concerning the distribution of incomes and wealth, banking, and politics. The study makes three main points. First, the measurement of income flows and living standards needs to be adjusted in two respects. Second, since the crisis, Ireland has made a significantly stronger recovery than Iceland in terms of per capita income. Third, Iceland´s economic recovery from the crisis is marred by a visible deterioration of various components of the country´s social capital. JEL-Codes: G010.

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Macroeconomics and Household Heterogeneity

Cited by 202 publications

References 136 publications

Fiscal Consolidation Programs and Income Inequality

Fiscal Consolidation Programs and Income Inequality

On the Distribution of the Welfare Losses of Large Recessions

Ten Years After: Iceland’s Unfinished Business

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