Capital and Income Inequality: an Aggregate-Demand Complementarity

Bilbiie, F O, Känzig, D R and Surico, P (2022) Capital and Income Inequality: an Aggregate-Demand Complementarity. Journal of Monetary Economics, 126. pp. 154-169. ISSN 0304-3932

Abstract

A novel complementarity between capital and income inequality leads to a significant amplification of the effects of aggregate-demand shocks on consumption. We characterize this finding using a simple model with heterogeneity in household saving and income, nominal rigidities, and capital. A fiscal policy that redistributes capital income causes further amplification, whereas redistributing profits generates dampening. After an interest rate shock, consumption inequality is more countercyclical than income inequality, consistent with the available empirical evidence. Procyclical investment also requires a more aggressive Taylor rule in order to attain determinacy, and aggravates the forward guidance puzzle.