Journal
CAMBRIDGE JOURNAL OF ECONOMICS
Volume 40, Issue 2, Pages 373-399Publisher
OXFORD UNIV PRESS
DOI: 10.1093/cje/bev016
Keywords
Consumption; Saving; Inequality; Aggregate demand
Categories
Funding
- Institute for New Economic Thinking
- Federal Reserve Bank of St. Louis
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Rising inequality reduced income growth for the bottom 95% of the US personal income distribution beginning about 1980. To maintain stable debt to income, this group's consumption-income ratio needed to decline, which did not happen through 2006, and its debt-income ratio rose dramatically, unlike the ratio for the top 5%. In the Great Recession, the consumption-income ratio for the bottom 95% did finally decline, consistent with tighter borrowing constraints, whilst the top 5% ratio rose, consistent with consumption smoothing. We argue that higher inequality and the associated demand drag helps explain the slow recovery.
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