Maliar, L., S. Maliar and J. Mora
The B.E. Journal of Macroeconomics – 5.1 (2005): (Topics), Article 15
Keywords: neoclassical growth model, heterogeneous agents, aggregation, business cycle, income and wealth distributions, inequality
Abstract: This paper studies the business cycle dynamics of income and wealth distributions in the context of the neoclassical growth model where agents are heterogeneous in initial wealth and non-acquired skills. Our economy admits a representative consumer which enables us to characterize distributive dynamics by the evolution of aggregate quantities. We show that inequality in both wealth and income follow a countercyclical pattern: the former is countercyclical because labor income is more sensitive to the business cycle than capital income, while the latter is countercyclical due to the wealth-distribution effect. We find that the predictions of the model about the income distribution dynamics accord well with the U.S. data.