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.

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Item Type: Article
Subject Areas: Economics
Additional Information:

© 2022 Elsevier. This manuscript version is made available under the CC-BY-NC-ND licence

Surico gratefully acknowledges financial support from the European Research Council
(Consolidator Grant 771976).

Funder Name: European Research Council
Date Deposited: 07 Feb 2022 14:28
Date of first compliant deposit: 26 Apr 2022
Subjects: Interest rates
Monetary economics
Last Modified: 03 Sep 2022 00:31
URI: https://lbsresearch.london.edu/id/eprint/2209
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