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Shocks, Frictions, and Inequality in US Business Cycles

  • Christian Bayer
  • Benjamin Born
  • Ralph Luetticke
American Economic Review
vol. 114, no. 5, May 2024
(pp. 1211-47)
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Abstract

We show how a heterogeneous agent New Keynesian (HANK) model with incomplete markets and portfolio choice can be estimated in state space using a Bayesian approach. To render estimation feasible, the structure of the economy can be exploited and the dimensionality of the model automatically reduced based on the Bayesian priors. We apply this approach to analyze how much inequality matters for the business cycle and vice versa. Even when the model is estimated on aggregate data alone and with a set of shocks and frictions designed to match aggregate data, it broadly reproduces observed US inequality dynamics.

Citation

Bayer, Christian, Benjamin Born, and Ralph Luetticke. 2024. "Shocks, Frictions, and Inequality in US Business Cycles." American Economic Review, 114 (5): 1211-47. DOI: 10.1257/aer.20201875

Additional Materials

JEL Classification

  • D31 Personal Income, Wealth, and Their Distributions
  • D52 Incomplete Markets
  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
  • E32 Business Fluctuations; Cycles
  • E52 Monetary Policy
  • E62 Fiscal Policy