Wealth and Volatility

Wealth and Volatility

Figure 1 documents a strong negative relation in the United States between wealth (household net worth, from the Federal Reserve Flow of Funds, as a fraction of GDP) and aggregate volatility, measured as standard deviation of real GDP growth rate. Periods when net worth is high, reflecting high prices for housing and/or stocks, tend to be periods of low volatility in aggregate output, employmen...

Intertemporally Dependent Preferences and the Volatility of Consumption and Wealth

In this article we construct a model in which a consumer’s utility depends on the consumption history We describe a general equilibrium framework similar to Cox, Ingersoll, and Ross (1985a). A simple example is then solved in closedform in this general equilibrium setting to rationalize the observed stickiness of the consumption series relative to the fluctuations in stock market wealth. The sa...

Wealth inequality and macroeconomic volatility in two-sector economies

We explore the link between wealth inequality and macroeconomic volatility in a two-sector neoclassical growth model with heterogeneous agents. The model has a unique aggregate steady state which is independent of the level of inequality. However, whenever preferences do not exhibit hyperbolic absolute risk aversion, wealth heterogeneity may affect the volatility of output. In particular, we sh...

The role of the wealth distribution on output volatility

We explore the link between wealth inequality and business cycle fluctuations in a two-sector neoclassical growth model with endogenous labor and heterogeneous agents. Assuming that wealth inequality is described by the distribution of shares of capital, we show that in the most plausible situations wealth equality is a stabilizing factor. In particular, when wealth is Pareto distributed and pr...

Fiscal Sustainability, Volatility and Oil Wealth: A Stochastic Analysis of Fiscal Spending Rules