Income Inequality and the Depth of Economic Downturns

Economics Letters (forthcoming)

16 Pages Posted: 26 May 2021

See all articles by Emanuel Kohlscheen

Emanuel Kohlscheen

Bank for International Settlements (BIS)

Marco J. Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department

Egon Zakrajsek

Bank for International Settlements (BIS)

Date Written: May 1, 2021

Abstract

Using an international panel data set, we analyze the implications of rising income inequality for aggregate consumption. We document that greater concentration of (after-tax) income in the top decile is associated with a significantly larger and more persistent contraction in consumption in the aftermath of economic downturns. These findings are consistent with lower propensities to consume among wealthier households and imply that disparities in income flows at turning points of the business cycle can significantly influence macroeconomic outcomes.

Keywords: consumption, income inequality, recessions, financial crises

JEL Classification: D31, E20, E32

Suggested Citation

Kohlscheen, Emanuel and Lombardi, Marco Jacopo and Zakrajsek, Egon, Income Inequality and the Depth of Economic Downturns (May 1, 2021). Economics Letters (forthcoming), Available at SSRN: https://ssrn.com/abstract=3853504 or http://dx.doi.org/10.2139/ssrn.3853504

Emanuel Kohlscheen (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Marco Jacopo Lombardi

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland
+41612809492 (Phone)

Egon Zakrajsek

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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