American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Wealth Inequality, Aggregate Consumption, and Macroeconomic Trends under Incomplete Markets
American Economic Journal: Macroeconomics
(pp. 414–42)
Abstract
I construct an incomplete market model featuring a closed-form expression for optimal consumption. In the model, individual consumption is an isoelastic function of wealth, inclusive of income, yielding partial consumption smoothing based on borrowing and lending in response to income shocks. I show that the model replicates several empirical characteristics of inequality in consumption, income, and wealth and their dynamics at the individual level. Using the model, I show that the rising wealth inequality since the 1980s, induced by an increase in idiosyncratic income risk, has substantially contributed to trend-level changes in real interest rates, capital-to-income ratios, and consumption-to-wealth ratios.Citation
Lee, Byoungchan. 2025. "Wealth Inequality, Aggregate Consumption, and Macroeconomic Trends under Incomplete Markets." American Economic Journal: Macroeconomics 17 (1): 414–42. DOI: 10.1257/mac.20210490Additional Materials
JEL Classification
- D31 Personal Income, Wealth, and Their Distributions
- D52 Incomplete Markets
- E21 Macroeconomics: Consumption; Saving; Wealth
- E43 Interest Rates: Determination, Term Structure, and Effects
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth