Heterogeneity and Power Laws in Macroeconomics

Paper Session

Saturday, Jan. 7, 2017 10:15 AM – 12:15 PM

Hyatt Regency Chicago, Regency C
Hosted By: American Economic Association
  • Chair: Xavier Gabaix, Harvard University

Aggregate Demand and the Top 1%

Adrien Auclert
,
Princeton University
Matthew Rognlie
,
Massachusetts Institute of Technology

Abstract

There has been a large rise in U.S. top income inequality since the 1980s. We merge a widely studied model of the Pareto tail of labor incomes with a canonical model of consumption and savings to study the consequences of this increase for aggregate demand. Our model suggests that the rise of the top 1% may have led to a large increase in desired savings and can explain 0.6pp to 1pp of the fall in real interest rates. This effect cannot be attributed to differences in marginal propensities to consume, but arises from the combination of a wealth effect at the top and increased precautionary savings from declines lower in the income distribution.

Earnings Inequality and Other Determinants of Wealth Inequality

Alberto Bisin
,
New York University
Jess Benhabib
,
New York University
Mi Luo
,
New York University

Abstract

We study the relation between the distribution of stochastic earnings and the distribution of wealth in microfounded dynamic models. Our findings suggest, both theoretically as well as empirically, that while stochastic earnings and precautionary savings are important factors for explaining the distribution of wealth, they cannot by themselves account for the top shares in the distribution of wealth. Therefore other factors, like stochastic and idiosyncratic returns, as well as savings rates and rates of returns increasing in wealth may help to better explain the top wealth shares as well as wealth mobility.

Large Firms and International Business Cycle Comovement

Andrei A. Levchenko
,
University of Michigan
Julian di Giovanni
,
Pompeu Fabra University, BGSE, CREI, and CEPR
Isabelle Mejean
,
Ecole Polytechnique

Abstract

This paper investigates the role of the top 100 firms in France in aggregate business cycle comovement. We establish that the top 100 firms (i) are important in aggregate; (ii) exhibit stronger international linkages than the rest of the economy; and (iii) contribute substantially to aggregate comovement.

Why are Big Banks Getting Bigger?

Ricardo T. Fernholz
,
Claremont McKenna College
Christoffer Koch
,
Federal Reserve Bank of Dallas

Abstract

The U.S. banking sector has become substantially more concentrated since the 1990s, raising questions about both the causes and implications of this consolidation. We analyze the increasing concentration of banking assets using nonparametric empirical methods that characterize dynamic power law distributions in terms of two shaping factors—the reversion rates (a measure of cross-sectional mean reversion) and idiosyncratic volatilities of assets for different size-ranked banks. Using quarterly data for subsidiary commercial banks and thrifts and their parent bank-holding companies, we show that the greater concentration of U.S. bank-holding company assets is a result of decreased mean reversion, a result consistent with policy changes such as interstate branching deregulation and the repeal of Glass-Steagall. In contrast, the greater concentration of both U.S. commercial bank and thrift assets is a result of increased idiosyncratic volatility, yet, idiosyncratic volatility of parent bank-holding company assets decreased. This contrast suggests that diversification through non-banking activities has reduced the idiosyncratic asset volatilities of the largest bank-holding companies.
Discussant(s)
Erzo G.J. Luttmer
,
University of Minneapolis
Alexis Akira Toda
,
University of California-San Diego
Christoffer Koch
,
Federal Reserve Bank of Dallas
François Gourio
,
Federal Reserve Bank of Chicago
JEL Classifications
  • C1 - Econometric and Statistical Methods and Methodology: General
  • E1 - General Aggregative Models