TY  - JOUR
A1  - Clemens, Marius
A1  - Eydam, Ulrich
A1  - Heinemann, Maik
T1  - Inequality over the business cycle: the role of distributive shocks
JF  - Macroeconomic dynamics
N2  - This paper examines how wealth and income inequality dynamics are related to fluctuations in the functional income distribution over the business cycle. In a panel estimation for OECD countries between 1970 and 2016, although inequality is, on average countercyclical and significantly associated with the capital share, one-third of the countries display a pro- or noncyclical relationship. To analyze the observed pattern, we incorporate distributive shocks into an RBC model, where agents are ex ante heterogeneous with respect to wealth and ability. We find that whether wealth and income inequality behave countercyclically or not depends on the elasticity of intertemporal substitution and the persistence of shocks. We match the model to quarterly US data using Bayesian techniques. The parameter estimates point toward a non-monotonic relationship between productivity and inequality fluctuations. On impact, inequality increases in response to TFP shocks but subsequently declines. Furthermore, TFP shocks explain 17% of inequality fluctuations.
KW  - business cycle
KW  - income and wealth inequality
KW  - distributive shocks
KW  - D31
KW  - E25
KW  - E32
Y1  - 2021
U6  - https://doi.org/10.1017/S1365100521000523
SN  - 1365-1005
SN  - 1469-8056
VL  - 27
IS  - 3
SP  - 571
EP  - 600
PB  - Cambridge University Press
CY  - Cambridge
ER  -