The Distributional Effects of Economic Uncertainty

TL;DR

This paper examines how economic uncertainty shocks impact income and consumption inequality over time using a new model linking macroeconomic factors to household data, revealing complex short- and long-term distributional effects.

Contribution

It introduces a novel model connecting macroeconomic uncertainty to household income and consumption distributions, and applies Functional Local Projections for analysis.

Findings

Initially, low-earning workers decrease, and low consumption households increase.

Over time, low-income workers increase, but consumption inequality effects fade.

Functional Local Projections produce similar distributional results.

Abstract

We study the distributional implications of uncertainty shocks by developing a model that links macroeconomic aggregates to the US distribution of earnings and consumption. We find that: initially, the fraction of low-earning workers decreases, while the share of households reporting low consumption increases; at longer horizons, the fraction of low-income workers increases, but the consumption distribution reverts to its pre-shock shape. While the first phase reduces income inequality and increases consumption inequality, in the second stage income inequality rises, while the effects on consumption inequality dissipate. Finally, we introduce Functional Local Projections and show that they yield similar results.