Income Inequality and Macroeconomic Fluctuations

We document a relationship between income inequality and variability in aggregate consumption growth. In high-income countries, greater income inequality is associated with more volatility in consumption growth, whereas in lower-income countries, higher levels of income inequality are associated with less volatility. We present weaker evidence that variability in real GDP growth is also related to income inequality in the same way. Our results suggest that the level of ̄nanical development may help to explain why the distribution of income a®ects the short-run variability of consumption and output di®erently in high-income countries than in low-income countries.