Collaborative Research: Inequality and the Distributional Effects of Macroeconomic Policy

The goal of this project is study the distributional effects of macroeconomic policy using quantitative general equilibrium models of economic inequality. How does macroeconomic stabilization policy affect the welfare of different groups in the economy, such as the rich and the poor, or the employed and the unemployed? To what extent does stabilization policy provide a substitute for social insurance programs such as unemployment insurance? Does a reduction in the tax on dividends benefit those who do not hold stocks as well as those who do?

A common element in each of these policy questions is the equilibrium interaction between inequality, macroeconomic policy, and aggregate (or business cycle) risk. This project thus departs sharply from most existing analyses of the welfare effects of macroeconomic policy. These analyses typically either rely on the fiction of a representative, or average, consumer-in which case they are silent on the differential impact of policy on different groups of consumers-or they do not study macroeconomic fluctuations-in which case they are silent on the interaction between inequality, macroeconomic policy, and the business cycle. Although several existing frameworks have shown considerable success in accounting for the degree of economic inequality observed in the United States, the use of these models to explore and evaluate the distributional effects of macroeconomic policy is still in its infancy, particularly for policy questions concerning the interaction between inequality and the business cycle. This project aims to make both substantive and methodological contributions to the analysis of such policies.

Broader Impact

In addition to making substantive contributions concerning the distributional effects of macroeconomic policy and the origins of inequality, this project will make a methodological contribution by continuing the development of fast and accurate computational tools to study the equilibrium implications of economic models which feature both realistic business cycles and substantial inequality across consumers. Furthermore, the project also aims to extend indirect inference techniques to efficiently estimate large-scale general equilibrium models. These models should

have wider applicability in other fields of economics as well.