TY - JOUR AU - Krueger, Dirk AU - Mitman, Kurt AU - Perri, Fabrizio TI - Macroeconomics and Household Heterogeneity JF - National Bureau of Economic Research Working Paper Series VL - No. 22319 PY - 2016 Y2 - June 2016 DO - 10.3386/w22319 UR - http://www.nber.org/papers/w22319 L1 - http://www.nber.org/papers/w22319.pdf N1 - Author contact info: Dirk Krueger Economics Department University of Pennsylvania The Ronald O. Perelman Center for Political Science and Economics 133 South 36th Street Philadelphia, PA 19104 Tel: 215/898-6691 Fax: 215/573-2057 E-Mail: dkrueger@econ.upenn.edu Kurt Mitman Institute for International Economic Studies Stockholm University 106 91 Stockholm SWEDEN E-Mail: kurt.mitman@iies.su.se Fabrizio Perri Research Department Federal Reserve Bank of Minneapolis 90 Hennepin Avenue Minneapolis MN 55401 E-Mail: fperri@umn.edu AB - The goal of this chapter is to study how, and by how much, household income, wealth, and preference heterogeneity amplify and propagate a macroeconomic shock. We focus on the U.S. Great Recession of 2007-2009 and proceed in two steps. First, using data from the Panel Study of Income Dynamics, we document the patterns of household income, consumption and wealth inequality before and during the Great Recession. We then investigate how households in different segments of the wealth distribution were affected by income declines, and how they changed their expenditures differentially during the aggregate downturn. Motivated by this evidence, we study several variants of a standard heterogeneous household model with aggregate shocks and an endogenous cross-sectional wealth distribution. Our key finding is that wealth inequality can significantly amplify the impact of an aggregate shock, and it does so if the distribution features a sufficiently large fraction of households with very little net worth that sharply increase their saving (i.e. they are not hand-to mouth) as the recession hits. We document that both these features are observed in the PSID. We also investigate the role that social insurance policies, such as unemployment insurance, play in shaping the cross-sectional income and wealth distribution, and through it, the dynamics of business cycles. ER -